Tax Cut Explanation? Help Me Understand.

The following is an e-mail I recieved at work. I also overheard some die-hard "patriotes" (according to bush's definition) saying that 'yeah this is how it is". "Cut taxes for the rich yeah".
I for one do not believe this. In my opinion, you cut the taxes of the people who are actually spending money not the rich. I don't spend money when I know that 1/3 of my paycheck goes to taxes.

But at any rate, could somebody possibly give me some logical explanations on why somebody would believe this e-mail. I really haven't had the time to disect or discredit it (and probably won't) but it just seems to easy of an explanation. I cannot accept it. Is there anyone else that feels the way I do? Is there any one who can accept this explaination? I did read this with an open mind, but I just can't get past giving a tax cut to the rich other that keeping the rich rich, and the poor poor. I look forward to hearing everyone's comments & thearies.


Subject: Tax cuts explained


Here's a story for you from David R. Kamerschen, Ph. D, Distinguished
Professor of Economics at the University of Georgia. It's called "Tax
Cuts - A Simple Lesson In Economics."

Sometimes politicians can 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, we hope the following
will help.

This is how the cookie crumbles.

Let's put tax cuts in terms 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."
So, now 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 (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 last 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 $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 among all of them for
even half of the bill!

And that, 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 lots of good restaurants in Europe and
the Caribbean.
Pass this on to friends - as well as those who tend to listen to critics of
the Bush tax cuts.




[Edited on 15-3-2004 by John bull 1]

Cut taxes for the rich, they pay your freeking paycheck. You say they dont spend the money? What the hell do they do with it then? They invest it. They put it in savings accounts. They buy cars. They buy houses. They pay for food. They have to spend money like everyone else.

if you put money in a savings account, or into the stock market....are you under the oppinion that it just magically goes away, or just sits there???

That money gets forwarded to other businesses. If they cant spend the money, then they invest it. The cycle goes on until someone uses it to expand there company, or make new jobs. Why is it so hard to see this???

Yes, cut my taxes. But also cut the rich tax burden as well. They are the ones who pay your paycheck. They are the ones who maintain our economy. Like it or not.

Besides, why should anyone else be taxed more than me or you? Its there money. Its your money. Its not the governments. UGH!

Well I don't understand most of it myself but I can tell you that it is horse manuer. The fact is that democrats who complain about the Bush tax cut policy aren't complaining about the rich. That's just an excuse. I still see it as not wanting the American people to keep more of their money IMO. They're just trying to find every way imaginable to tax you more and more and so far I see no end to it. This has nothing to with whether your rich or not. This is simply of matter taking every American who works and finding any way possible to spend your money no matter how absurd it is. I once heard a democratic say that "The government knows how to spend your money better than you do. That's why we tax you more." Yeah, right. My ass they do.

I once heard a democratic say that "The government knows how to spend your money better than you do. That's why we tax you more."


Well maybe you shouldnt listen to morons because I have never heard anyone,republican or democrat say anything as absurd as what you claimed you heard!

These tax cuts ARE b.s. for alomst everyone that actually needs a tax cut.

The whole idea that the ''rich'' need a tax cut makes me laugh more than I can convey..truthfully...its almost like an oxy-moron

Tax them too much, attack them for being wealthy, and they just may not show
up at the table anymore. There are lots of good restaurants in Europe and
the Caribbean.

This part is my favorite ..is that a threat sir lol..oh your still here??? I thought you wanted to move to europe lol...

[Edited on 11-3-2004 by McGotti]

My employers are rich, they haven't given a raise to anybody in this company in over 3 years.

Thank you mrmulder, you seem like a lot more of an educated person than Seapeople.

I do understand you explanation. I just have a hard time moving past tax cuts for these people. Yes I am having tunnel vision on this issue but i just wish that somebody in the right place would say, enough tax cuts for the upper class, the real consumers are the middle & lower class lets cut thier taxes. Maybe know that they have MORE money they will spend more money.

Seapeople, I will never respect your authority if you continue to speak to people the way you do.

But at any rate, could somebody possibly give me some logical explanations on why somebody would believe this e-mail. I really haven't had the time to disect or discredit it (and probably won't) but it just seems to easy of an explanation. I cannot accept it. Is there anyone else that feels the way I do? Is there any one who can accept this explaination? I did read this with an open mind, but I just can't get past giving a tax cut to the rich other that keeping the rich rich, and the poor poor. I look forward to hearing everyone's comments & thearies.

It would be pretty hard to discredit the plain and simple truth. For your average family of four, if you have an income less than $39K, your federal tax liability is zero. In fact, at a lower income levels, say $30K or so, not only do you not owe Federal taxes, but you will receive a check by the magic of the Earned Income Tax Credit which, at the top of the scale, is over $4000. So, if you are going to give someone a tax reduction, doesn't it make sense that it would be someone who actually pay taxes?
The US system has brackets based upon your filing status and income level. Up until a certain point you pay nothing. After that point you'd pay say 10% on the next dollar earned, until you reach the next income level, and then you'd pay say 15% on the next dollar earned and so on somewhere around $300K a year you hit the top bracket. The current "tax cut for the rich" reduces that top rate from I believe 38.7% to 34%.

What we need are taxes to be set at the correct level by calculating the correct "Laffer" curve. For instance, if taxes were 100%, why get out of bed and go to work-you can't keep any of it. At 90% or 80% the revenues wouldn't increase much. On the other end of the scale, a 1% wouldn't generate much, a 2% would double and 4% would double again. If you posted all these points on a graph at some point the highest revenue to the goverment would be acheived because businessess and individuals will be motivated to grow their incomes without confiscatory tax rates.

Currently, on the next dollar I earn, I will pay 28% federal income tax, 10% state income tax, 7.625% FICA, and 1% to Medicare. That means if I make $1, I get to keep roughly $.53. If I spend that $.53, I am treated to a 7-8% sales tax unless I buy a bottle of wine, or some gas for a trip, or a hotel room and then the rate can climb to as much as 50%. Of course none of this includes corporate income taxes which are passed on directly to the consumer in the form of increased prices which by some estimates approaches 70% of the cost of the average product on the shelf. Currently, the smarter move is for me to not make another dollar, but to save a dollar. If I can nurse the old TV along for another year instead of buying a new one, I can save a few bucks. For every dollar I save, I would have to earn more than two to equal it. This creates a disincentive to spend and hence, lowers demand for goods and services which directly correlates to job growth.
Of course this doesn't address property taxes, personal property taxes, user fee's, license fee's, franchise fees on cable TV and cell phones, tax on water, tax on electricity, fees to put the internet in the classroom, the employer match on FICA, workers compensation insurance, estate taxes, alternative minimum tax or dog licenses, but I don't have room here to be all-inclusive.

If you spend any time reading you might pick up a copy of "Atlas Shrugged" by Ayn Rand at your local library. (which I pay for).

Trust me, in addition to being a dead Sumerian King, I'm also an MBA.

Thank you Sargon of Agade, that was a very informative read. I am starting to understand all this a little more now. I will need to read again before I could say that I do understand. My question to you is what is keeping us from calculating the correct "Laffer" curve & adjusting our taxes accordingly?

Well, the reason they don't draw a curve is because it's just a concept. It's only used to illustrate a point. There is no way you can actually plot the points, because it's impossible to anticipate what the marginal macro economic effects will be when you lower/raise taxes. The relationship between taxes and government revenue isn't linear. Moreover, low taxes will give people a higher income, which will increase their demand for money. This leads to inflation, which will cancel out the effect of the tax cut. The only result is that the government has less revenue and the people are no better off than before. All according to contemporary macro economic theories. I'm sorry to say that even though an MBA level is an accomplishment it doesn't make one an expert in all areas.

To address the original question, I would say that the example is true given that all people spend all of their income. There is a concept called marginal propensity to consume, which means how much of the next dollar earned a person will use for consumption. Empirical research shows that as income rises you consume less as a percentage of your next dollar earned.

The rest goes into some form of savings accounts or similar. For a country to grow it needs a certain balance between savings and consumption. I'm not going to argue that the US needs more of one or the other, but in essence, if you want consumption to increase you need to target the middle class.

This is almost a given because they are the largest group, with the largest aggregated income from wages, which is more easily taxed. Moreover they tend to spend more and sales taxes are important for governmental revenue.

I like to think of it like this. Our national debt is over 3.5 trillion dollars. Its this much $3,500,000,000,000.00 Now consider this money gathering interest daily and then consider every year that we use the current bush budget that has an annual deficit of 500 billion. ($500,000,000,000.00) Our national debt will be 6 trillion dollars by the year 2008 if bush gets reelected and keeps the same budget.

There is only around 650 billion dollars in us dollars in circulation worldwide and the us has probably around a trillion dollars in gold reserves. So take all that and it still would not pay off our current debt by half. Sad isn't it. Now do tax cuts sound like a good idea? Who is gonna pay this money back and how if the government never gonna have a surplus of extra money? Guess they better get on ebay and start auctioning of some of those priceless presidential artifacts and such. Every little bits gonna help cuz i don't see our monetary system holding up too much longer.
Hmm maybe thats why the value of prescious metals has been steadily going up I dunno.

OOPS I Was wrong the national debt is currently 7 trillion currently. My mistake looking at an old website. Heres a link to a current one. www.brillig.com...

[Edited on 12-3-2004 by Hoppinmad1]

[Edited on 12-3-2004 by Hoppinmad1]

my take on this tax issue;

people have forgotten that america was founded under god's principles;
alexander hamilton circumvented this by appealing to washington in re. to a central bank;

after the central bank was established greed settled in with the gov.

higher debt more credit opportunities thus more opportunities to control the people and force them into slavery via tax;

higher greed more money spent on creating more money; thus a perpetual cycle that dosent stop till the wheels fall off...

if america and its forefathers, ex presidents and foriegn delegates remembered that america was supposed to be different and not a slave colony of tax payers; america was intended to be a free country (only for whites;but thats another story) with unalienable god given rights to each soul...

unfortunately most white people have forgotten about these tax loopholes; and are also amongst those who were slaves only centuries earlier; yet now under a new term: "tax slave"

to allievate this there are tax cuts; but this dosent address the heart of the issue; america and its intention as a nation.

now most americans are boastfull, lying, overweight, and spitefull to themselves about the situation they are in and to others for the fact that they find security in these attributes rather than face the nakedness of the situation...

so we go to war; cut taxes; and persecute people who are different than us; all to help from looking in the mirror and face the reality of the situation...

america is going to hell in a handbasket and the wealthy only care about protecting themselves...

the poor only care about attaining what the wealthy have: due to greed...

and the middle class is befuddled loosing millions in stocks, increased gas prices, and higher tuitions for their children...

some find comfort in the ignorance continuing to consume as though there is no tommorow...

other find solace in the fact they are aware of what is going on; so they profit off the loss, and loose what they never had in the first place a soul that can stand up to unrighteousness and attempt to do right all that is done wrong...

and there is the special few who know that all this is just a charade; a test; and that most will fail some will wail and some will overcome to reunification with divinity of manifestation with immortal soul in tact...

it all really lies up to you...

"Well, the reason they don't draw a curve is because it's just a concept. It's only used to illustrate a point. There is no way you can actually plot the points, because it's impossible to anticipate what the marginal macro economic effects will be when you lower/raise taxes. The relationship between taxes and government revenue isn't linear. Moreover, low taxes will give people a higher income, which will increase their demand for money. This leads to inflation, which will cancel out the effect of the tax cut. The only result is that the government has less revenue and the people are no better off than before. All according to contemporary macro economic theories. I'm sorry to say that even though an MBA level is an accomplishment it doesn't make one an expert in all areas."

I humbly disagree. It might have been impossible, but with the advent of supercomputers and the like, writing the formula is possible. It would require input of a lot of data and would need to include the factors you mentioned as well as a multitude of others.

Laffer curve a concept? No, it's matematics and math deals in facts. Difficult yes, impossible no.

when you make a tax cut, it has to be across the board because if i make $19,999 and pay no taxes and go to earn 20,000 and suddenly have to pay taxes, why in the hell should i work harder? So if bush gave a monster cut to middleclass, all the slightly richer people would try to do less or hide more so they can best gain.

Democrats tried a luxury tax, a big fat one, to get those evil rich, turns out it killed many working class jobs, cause the sales of yahts and super cars dropped like a rock, therefore people had to be laid off.

RICH PEOPLE DO NOT PILE UP THEIR ILL GOTTEN MONEY AND BURN IT!!! that money everything but disappear.

Now here's the grand picture: People really want this to happen.
The hating of the rich, the have's, the people who seem to crunch little people and pay them crap cause in comparision it is crap, they are EVIL. So by this logic they deserve to get taxed A LOT cause what do they really need with that money? The government promises to give that money to the poor crushed people yay! But the system will never work that way, rich will get richer cause they'll bail or find some loop hole or chuck some money or power at a given candidate that benefits them the most. So what do the down trodden do? they rise up and take over the government and make everybody equal in a giant communist state. There are a lot of people who would like this, some like the militaristic way and other's like to go piece by piece. Look at the european countries, they have become socialist states, the next step up from communism and thier unemployment is huge, people are taxed out the wazoo and these great empires have become mired in more and more and more funding being needed outpacing growth.

Communism does not work PERIOD. there is no drive to become anything more than a leech or some down trodden worker because if you do work to become a doctor, you get the same crap as you did pumpin gas. Socialists just try to take a giant ax to the curve of wealth and even it flat, but people learn to just jump down to the bottom of the curve and gain the maximum benefit for the least work. THE "GREAT SOCIETY" HAS NEVER CURED THE PROBLEM homelessness has been at the same rate as it was 50 years ago, giving them more money is NOT the answer. Studies have shown that if you go poor and capitialize every benefit given to you, you are indirectly earning FIFTY GRAND A YEAR.

[Edited on 12-3-2004 by ANMAN]

in addition:
TO ELIMINATE THE DEFICIT, WORKS EVERY TIME, IS TO CUT TAXES AND GROW OUT OF IT.

Regan eliminated the buget deficit while at the same time spending the pants off the USSR to win the cold war. The rich were getting taxed 80+% before he stpeed in and he cut that hardcore creating the 1984 reccord growth only encompassed by the growth made by GEORGE BUSH since then.

Clinton had a lot of projected surpluses because the economy was hyper booming on information technology.

Why tax people more to have people work with less to keep our economy going? Why not give the people giant amounts of money to buy stuff?

Bush's budget is pretty crazy because he had kennedy work out the school funding, but he's just spending to keep democrats from spending more, and spending to take away issues from the democrats.

I hope to hell that Bush wins.


[Edited on 12-3-2004 by ANMAN]

Perhaps these two thoughts will spread some illuminiation on the subject....

"All taxation is robbery" - Lysander Spooner

"Taxation is the price we pay for civilization" - Oliver Wendal Homes


Have fun kiddies.

Well, Sargon, it's not a matter of supercomputers. One of the problems is to decide which variables to put in the equation. This cannot be done by a supercomputer.

Another problem is that the Laffer curve claims that there is an optimal tax rate for any given economy. But this means that the economy has to be in the same state at any given point. This is not the case as things change all the time. Not only do domestic issues matter but the world has an impact too. Even if supercomputers could get the proper tax rate, it wouldn't be valid for long.

And finally, it's not just mathematics nor do mathematics always deal with facts. Macro economics deal with behavior (e.g the economic man) and mathematics can be used to calculate probabilities and error margins of earlier calculations rather than facts.

Well put yergen. The devil is in the creation of the equation.

"Another problem is that the Laffer curve claims that there is an optimal tax rate for any given economy.'

This is also true, but don't you think that rates could shift as well? We currently use a one year sight picture...we could continue that and project the requirement for the next fiscal year.

Also, this doesn't have to be an exact science! If the best tax rate was 18.1254% per dollar of personal income for 2005 is the optimum answer, and the curve showed a range between 16-20%; isn't it a better answer than setting tax ranges based upon what is politically expedient? We can tax the rich, so we do? We can not tax a family of four who earns less than 40K to buy their vote? Do we base our tax structure on economics or on politics?

Whatever happens, don't get me started on zero-based budgeting!!!!


[Edited on 083131p://111 by Sargon of Agade]

Originally posted by Hoppinmad1
Every us citizen would have to pay $24,000.00 to pay us current debt.

It's $77,000.00. The ticker that keeps track of this is a block from my office!
It's a crappy punctuation point on the walk to my building!