Monday, 19 February 2007

TAX BREAKS AND THE RICH

Ken Berwitz

In "The Hopelessly Partisan Guide To American Politics" I wrote that if John F. Kennedy were alive today, with exactly the same positions he had when he was president, he would be a Republican.  One of the reasons for this conclusion was that JFK lowered taxes on the "rich" (has any class warrior ever defined that term?  If so let me know). 

When I hear people railing about how unfair this is, I often wonder who they think SHOULD get tax relief: 

-If you give it to people who don't pay taxes, or you give some people a greater proportion than the taxes they paid, it isn't a tax break.  It is income redistribution.  

-If you give it proportionally to the people who pay the taxes, you will inherently give more to "rich" people because they are who paid more taxes in the first place. 

Or, put another way, if you don't want "rich" people to get a greater proportion of tax relief than others, there is a simple way to even it out.  Tax them the same amount as the others.  Oh, you don't think that's fair?  You think that since they have more they should pay more?  Then stop moaning about tax breaks for the "rich" -- they're only getting back more because they paid more.

With this in mind, I would like to post a very funny and very instructive piece that was sent to me by my sister, Barbara.  It is attributed to David R. Kamerschen who is identified as a professor of economics at the University of Georgia.  When you stop laughing, I urge you to think about just how clearly it lays out taxation. 

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Sometimes politicians, journalists and others exclaim; "It's just a tax cut for the rich!" and it is just accepted to be fact.  But what does that really mean?
 
 Just in case you are not completely clear on this issue, I hope the following will help.
 
 Please read it carefully.   Let's put tax cuts in terms everyone can understand.


 Suppose that every day, ten men go out for dinner and the bill for all ten comes to $100.  If they paid their bill the way we pay our taxes, it would go something like this:
 
 The first four men (the poorest) would pay nothing.
 
 The fifth would pay $1.
 
 The sixth would pay $3.
 
 The seventh would pay $7.
 
 The eighth would pay $12.
 
 The ninth would pay $18.
 
 The tenth man (the richest) would pay $59.
 
 So, that's what they decided to do.
 
 The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day the owner threw them a curve.
 
 "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20."   Dinner for the ten now cost just $80.
 
 The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected.  They would still eat for free.   But what about the other six men - the paying customers?
 
  How could they divide the $20 windfall so that everyone would get his fair share?  They realized that $20 divided by six is $3.33.  But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to eat their meal  So, the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
 
 And so:
 
 The fifth man, like the first four, now paid nothing (100% savings).
 
 The sixth now paid $2 instead of $3 (33% savings).
 
 The seventh now pay $5 instead of $7 (28% savings).
 
 The eighth now paid $9 instead of $12 (25% savings).
 
 The ninth now paid $14 instead of $18 (22% savings).
 
 The tenth now paid $49 instead of $59 (16% savings).
 
 
Each of the six was better off than before.   And the first four continued to eat for free.
 
But once outside the restaurant, the men began to compare their savings.  "I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man," but he got $10!"  "Yeah, that's right," exclaimed the fifth man.  "I only saved a dollar too.  It's unfair that he got ten times more than me!"  "That's true!!" shouted the seventh man.  "Why should he get $10 back when I got only two?  The wealthy get all the breaks!"
 
 "Wait a minute," yelled the first four men in unison.  "We didn't get anything at all. The system exploits the poor!"
 
The nine men surrounded the tenth and beat him up.  The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him.  But when it came time to pay the bill, they discovered something important.  They didn't have enough money between all of them for even half of the bill!
 
And that, boys and girls, journalists and college professors, is how our tax system works.
 
The people who pay the highest taxes get the most benefit from a tax reduction.  Tax them too much, attack them for being wealthy, and they just may not show up anymore.  In fact, they might start eating overseas where the atmosphere is somewhat friendlier.
 
 David R. Kamerschen, Ph..D
 Professor ofEconomics
 University of Georgia

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