How Taxes Work . . .

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, and the tenth man — the richest — would pay $59. 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 (in tax language a tax cut). "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 $80.00.

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 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 paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. 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 who pointed to the tenth. "But he got $7!" "Yeah, that's right," exclaimed the fifth man, "I only saved a dollar, too . . . It's unfair that he got seven times more than me!". "That's true!" shouted the seventh man, "why should he get $7 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 he 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, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, is how the 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.

Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!

T. Davies
Professor of Accounting
Chairman - Division of Accounting and Business Law
University of South Dakota

Michael Medved hits one out of the park.

"Leviticus 19:15 declares: "You shall not commit a perversion of justice: you shall not favor the poor and you shall not honor the great, with righteousness shall you judge your fellow."

About fifteen years ago I engaged in a memorable public debate with my friend Dennis Prager in which he rightly identified this passage as perhaps the most crucial conservative verse in the whole Bible.

It should, indeed, come as a revelation and a rebuke to all liberals that Holy Scripture identifies "favoring the poor" as "a perversion of justice."

As I argued in my recent townhall column about the essence of liberalism (posted on March 21st), the outlook of the left insists upon favoring the poor and the unfortunate—and thereby injecting unfairness and discrimination into the very core of politics and government. Favoring the poor, like favoring the rich, brings unequal treatment based on status, not actions. Justice requires rewarding good behavior, no matter its source, and discouraging and punishing bad actions, no matter who performs them.

Concerning the crucial sentence, Rabbi SchlomoYitzhaki (Rashi), the great 11th Century sage commented: "'You shall not favor the poor' means that you should not say that a wealthy man is obligated to help the poor, therefore it is proper for a judge to rule in favor of the poor litigant. Torah insists that justice be rendered honestly; as important as charity is, it must not interfere with justice."

Jewish tradition goes on to clarify the apparent contradiction between numerous Biblical injunctions to act compassionately to the poor, to the widow and the orphan, and this unequivocal insistence on avoiding favoritism. The essential point is that it's the individual that's primarily commanded to display compassion and give charity, while the government, particularly in its judicial aspect, must judge actions, not persons."

I couldn't have said it better myself.

This is an entirely different GOPGeezer from the one to which we have become accustomed on this Board.

Is there an identity thief on the loose and unaccounted for?

It should show you exactly what is really wrong with our tax system.  For taxing by percentages of income, how do you tax this fairly?

If you tax the top 5 percent 52% as you say, 4.9 percent are probably going going to be overtaxed.

That's income.  That's not even assets.  

-- Modified on 4/15/2007 10:21:45 PM

Where did I come with 5 percent?

The example was in 10% increments and you know very well that its not exactly how our progessive tax system works, but is pretty close for a simple granularity of only 10% increments.

Assets? What? You want to start taxing those now, while people are still alive? We do a pretty good job of doing it now after they die.

This Chandler guy sounds like either a real socialist or he's just got Bill Gates envy. $100,000 is rich according to him? Right.

Plus he very dishonest, comparing the median annual imcome of $40,000 vs Gates' net worth of $50 billion (plus he claims that Gates had a one recorded income of $50 billion).

I wonder what Gates' tax bill is? Even if he gets himself down to a 25% marginal braket at an average 10% ROI per year thats $5 billion income and therefore $1 BILLION in taxes. Stack that up against the taxes paid by the $40,000 /year income for family of just 2 (no kids) would be less than $3000.

The great this about it is that everyone in America is free to and has the potential to become the next Bill Gates.

-- Modified on 4/15/2007 11:42:47 PM

Just to say if you cut it finer.  But then I obscured it by putting your number in.

Socialist.  Don't look at what he's advocating.  You could take that or leave it, without any loss. Yes, in effect, it's dishonest, but even if Gates and the top 100 richest people in this country draw 2 percent of that a year, that's still 1 kilo meter above anybody else.  That's a kilometer compared to centimeters.  

Would Bill Gates even notice it if he were taxed 30 percent?  You're leaving out the Economic Law of Marginal Utility. You point about the top 100 billionaires being taxed and how much they put into the government might be true, but can you really say at even at the rate you give that they are overtaxed?  I mean, above a billion dollars, or lower, is there really any more economic benefit to them?  It's purely psychologically then, it's a matter of two things: ego and power. That's all.    

Which gets me to the next point: you are seeing this as simply an economic phenomena.  What you're not considering is that it's a hell of a lot of power.  The 100 people in the top category *are* a government.  Gates is, fortunately, a very beneficent one.  But how many assassins can one of them hire?  They can get their own army.  Never mind bribing every IRS agent who might be motivated to collect taxes.  They can spy on our government. In fact, they can theoretically be a shadow government.  At that level, taxes flow to them, as they are given earmarks and tax breaks.      

That's not envy I feel: that's fear. I'm not speaking paranoia, when you consider it as power and not as economics, what I've given is rationally believable.

Yes, anybody can become Bill Gates: unless Bill Gates or his club don't want you to.  Perhaps we never hear about it, but must happen because that's how power works with or without money; for minorities it would probably be more frequent.  

I don't say we should tax assets-- I just suggested that it would be more disproportionate if they were considered. I have heard of one billionaire who owns land that's an area well over the size of Connecticut. So, governs his own state.

I'm not even strongly suggesting these people to be taxed more, because as I've argued, it can't practically be done.  Which leaves the problem: comparing it to the rest US income, how do we can we tax the rest and expect to collect enough for the government?  Any series of tax brackets you give is not going to be enough to effectively govern the "proletariat."  In fact, due to the power vacuum, it's likely that billionaires will step in as the government.

"but even if Gates and the top 100 richest people in this country draw 2 percent of that a year, that's still 1 kilo meter above anybody else.  That's a kilometer compared to centimeters."

Actually they can easily do better than 2% per year without even touching the capital. I used 10% which is reasonable. No matter what you pick for their ROI, the height of the bills of JUST THEIR TAXES will ALSO be measured in kilometers.

In addition their stack of taxes is going to be almost 3 times disproportionaly higher than the average earner. In other words their tax RATE is almost THREE TIMES GREATER.

Are you sure you aren't angling for more redistribution of wealth?

-- Modified on 4/16/2007 6:26:09 PM

"Would Bill Gates even notice it if he were taxed 30 percent?  You're leaving out the Economic Law of Marginal Utility. You point about the top 100 billionaires being taxed and how much they put into the government might be true, but can you really say at even at the rate you give that they are overtaxed?  I mean, above a billion dollars, or lower, is there really any more economic benefit to them?  It's purely psychologically then, it's a matter of two things: ego and power. That's all."

Gates is probably only taxed at closer to 15% since most of his income is technically unearned and so is taxed as capital gains or dividends.

30%? Why stop there? Why not 40%? 60%? 80%? Reason, because it affects the economy, adversely.

"Economic Law of Marginal Utility" ? I've never seen it applied directly to capital, but to goods or services.

You think Gates doesn't appreciate that last dollar he made last year as much as the first? Maybe not, but the question is, What did he do with any or all of them? You might argue against a lavish life style maybe, but I know the latter dollars were not stuffed into a mattress. No, he invested them (or gave some to charity). Do you really think that the "extra" dollars were used to stroke his ego? I admit they gives him more power. But they were used to hire people and create even MORE capital. These earnings are not static, they are not part of a zero sum gain. For each dollar put into Gates' pocket there is NOT a corresponding dollar comming out of yours nor anyone elses.

Anyway, the utility of any of those dollars was, I dare say, far greater than any utility the government could have or would have gotten from them.

If the ELMU can be applied to any capital, I suggest it would be (no, I declare it is) the government that has NO idea or appreciation of what to do with the extra dollars.

-- Modified on 4/16/2007 6:23:48 PM

"Which gets me to the next point: you are seeing this as simply an economic phenomena.  What you're not considering is that it's a hell of a lot of power.  The 100 people in the top category *are* a government.  Gates is, fortunately, a very beneficent one.  But how many assassins can one of them hire?  They can get their own army.  Never mind bribing every IRS agent who might be motivated to collect taxes.  They can spy on our government. In fact, they can theoretically be a shadow government.  At that level, taxes flow to them, as they are given earmarks and tax breaks."

The top 100 ARE a govenment? Give me a break. You indeed ARE paranoid. Where is there ANY evidence of that. Sorry, I forgot that with soo much power they can hide all the evidence.

You really don't see evil lurking under every rock, just waiting to get it's hands on a billion dollars, do you?

"Yes, anybody can become Bill Gates: unless Bill Gates or his club don't want you to.  Perhaps we never hear about it, but must happen because that's how power works with or without money; for minorities it would probably be more frequent."

OK, I'll quit mocking you because I think that you truly believe these words.

According to Forbes there are now 946 billionaires in the world. Surely no governement restrictions or national boundaries could restrict "The Club", so we must look at the club as a world organization. There were 178 newcomers to the Billionaires Club this past year. Surely they were all vetted by the nominating committee. Nevermind that most of the memebers are actualy competitors or enemys of others in the club.

Compared to J.D. Rockefeller, all these guys are pikers. Analyzed either in raw dollars adjusted for inflation or wealth as a percentage of GDP, Rockefeller's wealth was almost 6 times that of Gates.

But we survived him, didn't we? Granted, it took government action to bust up Standard Oil, but we were vigilent and successful.

If need be we can be again. Microsoft has already been under the DOJ's microscope once.

I think you need to place more faith in our government. You know, that thing that you really wish had most of Bill Gates' money.

. . . was why an income tax was instituted to begin with. You say we can do it.  We just don't want to?  Why the procrastination?

It's ironic that you, of all people, say I should place more faith in our government.  Yes, I think in contemporary USA, there's little reason to trust the government.

As for the government "wanting" to get Gate's money, who?  A government doesn't have "desires."  Maybe somebody would like to steal it after it's compensated, similar to what happened with Gasprom in Russia.  Certainly, Vladimir Putin got a cut of that, and was probably very generous to his friends with it.  

Unless you could put your finger on these beneficiaries using the government to fulfill their desires, talking of the government desiring money doesn't make sense.  Welfare recipients wouldn't count very much, I think.  Many of them probably never get to the polls.

Re-read my provoking sentence.

Well, you don't trust rich people. You don't trust big business. You don't trust government. Time to dust off your evacuation plan, EH?

But to answer your questions: as long as citizens realized that to maintain their interests and liberties, that they must play off those three groups two against one, one checking the other two, then it can work.  But human beings or mortal, and anything we create-- including nations, are mortal.  

I would hate to leave the US and squat in Canada.  Living in the US right now is like reading a very novel.  I can't wait for the next page.

Freedom to create capital.  Forget "Fairness" in taxes for one moment.  You do realize that while Gates is worth a gazillion $s - it is tied up in investments - that is - putting others to work - and guess what - they get paid.  The creation of additional wealth.

But since you hate wages and wish to be handed wealth... well, I guess no matter what anyone does... to actually earn a living or create wealth - you would think of it negatively.  

and just think, you can live in Canada and still watch the US TV... heck - they even watch american football as opposed to soccer.

The best thing about america?  anyone can do well.... anyone can achieve monetary accumulation... anyone can start a company... you do not have to be "born into it"!  How many inventions do you have to have - to make a million $s?  answer - NONE!  Sam Walton.  You only have to offer to people something that enough of them want or need, at a price the market will bear - to get business.  (For all you MBA types out there, I know it is more involved than that- but for the puposes of this argument - and without giving you my book.... in reality those are the basics... ask any of the successful indy ladies - price sensitivity, looks and services... )

But to look to a more liberal approach to economics.... rarely is there incentive to be creative... to come up with a more efficient widget, to come up with a new widget or heck, to even produce the old widget well...  Example?  the Soviet style economy... without incentives - humans do not perform well.  Heck, even in hating capitalism - some are producing a product... hate!  and it feeds many in the land today.

So Z - you don't feel that capitalism is fair.... let me give you a real life example... I do not make a pile of money... but I make enough.. and roughly 5 figures each year go to my ex.. for child support - to say nothing of an additional 5 figures cause she does not provide them with what I pay her and the kids are with me about 45-50% of the time.  She makes approximately 3x my salary.  and her current hubby makes about what I make... she - broke all the time... with (by my estimate) about 75K in consumer debt - plus owing on 4 cars... (only 2 drivers in the house!).  Me? Money in the bank, savings for the kids college and I own my own car... debt? none... and am thinking of paying cash for a house.... go figure.  

What is the difference?  1) she and her current hubby do things that they cannot afford. 2) they fail to plan 3) NO - ZERO - self control and 4) the more money they have - the more they feel that they have to demonstrate to others - that they have $$!  my vice?  this hobby. look at my rate of reviews... about 1/2 of what i do... and you will see it is not voracious.  The other day I was out with a young lady... and she looked at MY schedule... her comment - she thought that she was busy... but realized that if I chose to spend time with her - that was a BIG HUMONGOUS DEAL - which is why rushed appointments - gals who schedule OVER the time I paid for etc... really really really tick me off. - the point of this being... time is most precious to me...

but what is the take home lesson from my rant!?  it is just this - we have freedom in this country to make really - really - really dumb decisions.... no one is gonna stop you.  but if you do, please do not turn to me - and say - "bail me out - cause you've more than me"!   and the whining left - that is all that they want... and all that they have to offer. (don't get me wrong - the right has problems and issues as well but they differ).

Another example - many (if not most) of the health issues in the US are due to one of the following:
1) smoking
2) obesity
3) poor diet
4) physical inactivity.

are any of those gonna be cured by Rx or a hospital? no?  but those ALL involve choices.... each and every one.  WE live in the land of the free - you, my friend, are free to smoke, eat or drink yourself to death... but why does the govenment feel free to make me pay for your bad choices....

I know several strippers who put themselves through college & grad school by stripping.... and I know several who choose not to go to school.... and wonder why the tips and lap dances go away - with age.  Freedom - it is both a terrible burden and a wondrous adventure.

So Z?  are you free?  or burdened... with all the choices that you have to make.  or would you rather a govenment that cannot even defend its own borders make the choices for you.

oh - and Canada?  you've damn little choice on health care... unless you dig into your pocket - get into your car and drive the 100-200 miles to the US border and get the care you need when you need it!  Oh, I'll bet you would hate to leave the US.... lots you would give up.

...and most of Western Europe.  See the link below.  The *main* reason I wanted to go was because I *love* wages.  If you want to know, that is why I would want to leave.  The US is not upwardly mobile by comparison.  Perhaps it was true once, it hasn't been true in for a long while at least.  

About billionaires and their huge inertial cash reserves benefiting other people by hoarding their money for investment. Yes, I know hoarding cash is probably the best thing anybody can do for humankind.  It creates wealth like a gold mine.

However, there's another interpretation of that which is not so warm and rosy.  They have tons of money that they will never personally use, but the only way to get them to release it is to give them more money. So, like gravity, the wealth of an economy gravitates toward-- the most wealth.  Have you ever thought of it like that?  

That it "creates wealth," isn't questioned, but maybe most of the wealth is then shifted to the most wealthy?  

I really don't know.  My analysis is stuck there.  However, that alone keeps me questioning what I hear about infinite bank accounts being such a wonderful economic resource. Maybe it's one way to capitalize, that doesn't mean it is the best or most efficient  means of doing. Quite possibly it's not the panacea, but it's the best people can do so far.  

Sam Walton did have an innovation: just-in-time inventory.  Nothing is warehoused; everything gets to the shelf just on time for purchase, and inventories are tracked automatically whenever something is rung up on the cash register.  It was something that only could have been done in the computer age.

About the left whining to be bailed out: it seems more like what anybody would if they are in trouble. Chrysler did it when they were in trouble. Lockheed did it. The airlines looked for handouts after 9/11. There's nothing at all liberal about any of those entities.  But the thing is, when you're in trouble, you'll use whatever influence you have-- including with government.

About wanting hand-outs: I'll argue that making the government directly beneficial to its people is in the interest of practically every citizen.

Many would argue that the only proper role of the state is policing and national defense. My argument: a nation can't do just those and remain one nation.  Why?  Because if people aren't aware that they are benefiting from the nation directly, then the nation will atomize. People will get alienated. Since the the military and the police draw their personnel from an alienated populace, both will both will break down in corruption and prey on the citizens, who then become more alienated.  That problem can be illustrated in Iraq-- drawing a police force and an Army together from a population that doesn't see any benefits to being part of something called Iraq.  

More about "handouts": Otto von Bismark, was the first to institute a national social security. Do you think he was liberal?  He was as far away as a fuzzy-hearted liberal as you could get.  He didn't believe in bailing people out-- but he had just United Germany and needed to make people want to fight for it and pay taxes to it.  That and his other "social programs" worked, and Germany, which had been a score of small nations just 20 years before was a major power.

If you think Roosevelt created social programs because he was nice guy, I don't believe it. That was the icing he put on it. Really, the purpose was to draw the nation together instead of letting it become alienated and atomized.    

I know in America we're supposed to do anything in service for our country, and the idea that the country would do anything for us is sacrilegious.  True, Americans will die for their country,

...but then you talk about taxes, and you find out, they are much less willing to maintain their country day to day.  Yes, it will usually be posed in arguments like "wages aren't income," "we're the most overtaxed people in the world (untrue!),"  "we should have the right to keep our money," "the government will just waste it anyway."  

Not anywhere else does civil disobedience correspond so closely to monetary gain as when a citizen bravely decides to pocket more money as a matter of justice..  

That's really the weak point of our citizen's honor for their country.  

Now I'm too friggin tired.  And look what I haven't gotten to yet.  I'll try to say it fast: it's really too bad your divorced sucked, but if you get to use it as an example of unfairness, can I talk about the South?  

I'm always happy when beautiful, intelligent women succeed.  Or when anybody succeeds, but I have to admit I pay more attention to the strippers doing it.

Yes, smoking, obesity, poor diet and physical inactivity (sheesh I've been sitting here a long time) are a matters for human will. . .

Oh, the hell with it.  goodnight.  

   
 

go!  please - good ridance. and while I use my divorce as an example - it insults no one.  as I just simply stated fact - which by the way if you had the names of the people - you could verify with public information.  I do not insult an entire region of the country.  

As for your reference... well!  they are supported by the Pew Charitable trust... a bastion of support for the American way... NOT!

And I think it amusing that you think that bill gates and company have their funds sitting in a bank account!  lol!!!!!  You really are naieve.

But I do agree with you about corporate bail outs.... shouldn't happen.  Falsely fails to inspire and support innovation... who knows, if we had not bailed out chrysler - maybe someone would have started a new car company that would have focused on alternative energy sources for cars... so - good point on that -

Sitting in a bank account was just rhetorical; I should just have said: parked under their ownership-- meaning, they will likely never have need to spend it.  It's marginal utility is high.  Yet, it's money that's issued into the economy.  The powers that be (who have large sums of money) will tell you that it benefits everyone.  Economists don't have much of anything to compare it to.    

For who made the study, oh please.  Check the stats, and look at the methodology-- then find the flaw.  At least when a conservative comes out with a study, I will look and see what may be wrong about its methods or conclusions.  Or why it's made out of whole cloth.  I don't think Pew just made their stats up.  

Your example of family-- you consider it an example, but it looked more like a tangent, especially with all the details given.  

I wish you would have had some comment about Bismark, or what social programs really should do. I would have liked your comment on it.  

You agreed about corporate bail outs but not my point: whenever anybody is in danger of their livelihoods, they'll use all their contacts, in government or outside to get a rescue.  That's close to "human nature" i.e. what anybody would do, not a quality isolated in the welfare class.

further, I have been through more hostile takeovers, mergers, acquisitions and divestitures that you can possibly imagine.  and no one gave on whit about me.  so support the chrylsler bailout? no.... what did I do - I moved on with my life.  And that is what the good folks at Chrylser should have done... In the short run - that is tremeandously painful to the employees and everyone else, but in the long run, it is economically healthier.  Large corps do not employ most of the folks in the US... it is the smaller companies that employ most folks in the US.  Of the 5M or so companies, 99.7% had fewer than 500 employees.  Small firms (fewer than 500 employees) employ 56.5% of the private sector employees... so bailing big business to support jobs?  gimme a break - dude understand the economy and you will understand that the bailout was not justified.

-- Modified on 4/19/2007 7:30:44 AM

And any small company worth its salt would have done the same thing Chrysler did if the option were open to them.  Why?  Because it's not and eithical, and because when your livelihood is on the line, you'll do anything you can.  This is completely in line with capitalism, because it's based first on self-interests.

Really if you look at it in terms of contracts and government handouts, the most profitable investment a company can make is to donate to politicians.  The return on "investment" on that is enormous. I'm waiting for the day when candidates sell stock.

In true capitalism companies that cannot make it - fail.  bad ideas, no market, price point too sensitive etc... and quite frankly what we have not stiffles innovation - quite a bit...

Read the link above - and you will grasp why large corps should have, and would in a true capitalist society, a finite life span.  

-- Modified on 4/23/2007 6:09:47 PM

You won't change that behavior and it's based on self-interest and personal profit too. Your rebuttal is totally rhetorical.

My argument wasn't that seeking profit and favors from the government was really capitalism, my argument was that was the very same human behavior driving capitalism.  Please understand that distinction. It's still self-interest.    

Because "capitalism" cannot encompass all of human profit or self-interest, you are never going to get near "true capitalism" at least for not very long. Why? Because money is also power.

Another point I have to make: separating the political and social system from the economic, as champions of capitalism will do, is simply heuristic and leads to false conclusions. The way it happens in the real world political, social and economic cannot be separated. It is impossible.  If you look at just the economic, people will hardly ever behave in the way pure capitalists want them to. There's too many other ways to profit, and too many ways to make profit into social and political power. If you follow the money, also follow the power.            


-- Modified on 4/24/2007 1:09:58 AM