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Tax cuts explained

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#1 JanetM


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Posted 19 October 2004 - 09:00 AM

Tax Cuts Explained

from David R. Kamerschen, Ph.D. Professor of Economics 536 Brooks Hall University of Georgia

Let's put tax cuts in terms that everyone can understand. Suppose that every day, ten men go out for dinner. 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 $7.
The eighth $12.
The ninth $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."

Now, the dinner for the ten only cost $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, the paying customers? How could they divvy up the $20 windfall so that everyone would get his 'fair share'?

The six men 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 paid $5 instead of $7 (29% 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 $50 instead of $59 (15% 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 $9!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got nine times more than me!"

"That's true!!" shouted the seventh man. "Why should he get $9 back when I got only $2? 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 at the table anymore. There are other places offshore with nice restaurants and good business opportunities.


#2 jevd


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Posted 19 October 2004 - 09:36 AM

Maybe we should send this to our friendly legislators especially the ones that lean a tad to the left!!
Making the complex understandable.

#3 nherkowitz


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Posted 19 October 2004 - 10:03 AM

:blink: You forgot that the wealthy person received a tax break down to 25% because their income was capital gains and dividends, and the restaurant likes that better than wages.

#4 KJohnson


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Posted 19 October 2004 - 10:52 AM

How Taxes Work....

Let's put the tax cut on corporate dividends in terms everyone can understand. Suppose that every day, ten men who work at a plumbing business go out for dinner. The business president orders filet mignon and champagne every night costing $30, the supervisor orders duck and wine costing $25, the remaining eight plumbers and helpers always get hamburgers and beer costing $9 dollars each. They each decide to pay for their own meal. 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 restaurant owner threw them a curve (in tax language, a dividend tax cut)

After the meal, the restaurant owner said that “since you are all such good customers I'm not going to charge for filet, duck, champagne or wine tonight.” The president and supervisor insisted that they pay the bill as always. So the president and the supervisor got their meals for free. The plumbers and helpers objected saying that—“He gave us the discount because we were all such good customers. In fact, our combined bill each night was well over 50% of the total bill, yet we are getting no benefit. ” That all may be true said the president and the supervisor, but you never have eaten filet and duck and never have had any wine or champagne to drink. Of course, we understand that since you are not rich, you couldn’t afford these things. But, be that as it may, you are still not entitled to any benefit.” “What’s more”, the president chimed in, “the restaurant owner is a friend of mine from the country club.”

The plumbers and helpers decided that this was blatantly unfair and went to work for a competing business. They also decided to boycott the restaurant and urged all of their friends to do likewise. In two years both the president and the restaurant owner were out of work.

And that, boys and girls, journalists and college instructors, is how the tax cut on dividends works.

#5 rcline46


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Posted 19 October 2004 - 11:26 AM

Kjohnson - I understand the first example. However, your example seems to be missing me, I don't follow it.

I know that dividends are double taxed - once to corp, second as income to recipient. At no time are the untaxed. Your example does not seem relevant to the corp itself if dividends were allowed to be deducted, and those who received the dividends, even if given a break from ordinary income taxes would still be paying taxes, not getting a free ride.

#6 actuarysmith


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Posted 19 October 2004 - 01:30 PM

Kjohnson - cute story, but I have one question....

Exactly WHO built the "competing company" that all those plumbers ended up working for?

Why did the person build that company? What was the motiviation? Why should he or she have taken the risks involved in building that company?

Do you think that the plumbers in your story pay the same taxes as that person who built that company? should they?

Ok, I will step down (carefully) off my soap box and stop preaching now..........

#7 Bird


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Posted 19 October 2004 - 06:23 PM

Mmmm, I've seen this one before. IMO, if you want to explain how the Bush tax cuts work, when it comes time to pay the bill, the owner would say "The tab is $100 as usual, but you can pay $90 now and $10 later."

What's interesting is the debate about who pays the $10 later.

#8 Earl


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Posted 20 November 2004 - 03:24 PM

is 90/10 a realistic split?

just wondering