an example of how our tax system works

[eugene@signmakershc.com]

BAR STOOL ECONOMICS

Suppose that every day, ten men go out for a beer 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 $1.00

The sixth would pay $3.00

The seventh would pay $7.00

The eighth would pay $12.00

The ninth would pay $18.00

The tenth man (the richest) would pay $59.00

So that’s what they decided to do. The men drank in the bar every day and seemed quite happy with arraignment, 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 beer by $20.00.

“Drinks for the ten men now cost just $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 drink for free. But what about the other six men – the paying customers? How could they divide the $ 20 windfall so that everyone would get there “fair share?” They realized that $ 20.00 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 drink his beer. So, the bar 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 drink 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, 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 union. “ 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 drinks, so the nine sat down and had beers 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, journalist 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 drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible

[Snoochie]

BAR STOOL ECONOMICS

Suppose that every day, ten men go out for a beer 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 $1.00

The sixth would pay $3.00

The seventh would pay $7.00

The eighth would pay $12.00

The ninth would pay $18.00

The tenth man (the richest) would pay $59.00

So that’s what they decided to do. The men drank in the bar every day and seemed quite happy with arraignment, 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 beer by $20.00.

“Drinks for the ten men now cost just $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 drink for free. But what about the other six men – the paying customers? How could they divide the $ 20 windfall so that everyone would get there “fair share?” They realized that $ 20.00 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 drink his beer. So, the bar 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 drink 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, 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 union. “ 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 drinks, so the nine sat down and had beers 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, journalist 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 drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible

Be sure to explain that to Obama when he enters his second term.

or,

Maybe you should see if you can be appointed to Tim Geitners position......................

and,

I wish it all was that simplistic but it's not.

Dominic

[Bolton Sign]

It's definitely not that simple.

First off this is old. It used to be falsely attributed to a few different economics/accounting professors. Some we’re made up and others got pissed off their name was used.

It also ignores basic elements of what makes our American version of capitalism work.

All of these guys are going to the same bar?

The story is implying rich and poor all march arm-in-arm to the same bar to have a sociable drink together.

Reality:

-one goes to a private club, where he drinks rare single malt

-the next goes to a high class bar where he has a martini

-the next has a glass of respectable wine at a nice bar

-the next has an imported beer

-the next couple of guys domestic beer

-the next couple stay at home and drink tap water

-the last drinks from a water fountain in the park before trying to find a homeless shelter with an open bed for the night

Overall income tax is simple, but most people don’t understand how it works. Even more surprising are the rare few who know what it’s TRUE intent was back in the early 1900’s.

When the bill first went through congress and was signed into law by the president, it’s original intent was to be a tax on the rich. It also had language that it was never to be changed from it’s original intent. It was supposed to tax the top 1-4% of earners in the country because they we’re the most able to pay and should be called upon to contribute to the common well being of according to their capacity. That being true it was levied exclusively on the richest Americans. The income tax was also part of an effort to dismantle America's Protectionist policies. At the same time the income tax was passed congress lowered Tariffs from 40% to 25% as well. This was the beginning of the dismantling of the American System of Economics as a whole.

Since it was signed into law there has been a sustained political effort from those at the very top to spread the income tax burden to the rest of the classes. The reason the super rich wanted to do this isn’t complicated to understand. Considering they understood that the more the average person had to pay income tax, the less pressure would come on the shoulders of the super rich. Also, even more important, the super rich understands that the more the tax is spread across a bigger percentage of the middle the more likely most average people would become their allies in arguing against an income tax increase. Stories like barstool economics are nothing more than slick pieces of propaganda.

The story says in so many words that when there is a tax cut given, the $20 discount, and the overwhelming majority of this goes to the richest person and proportionally to everyone else. This just isn't the case.

You have to understand marginal tax rates to get this. It’s not that it’s complicated but most really just don’t get it. Pardon me if you already know this.

Basically everyone is taxed the same on their first 50k and so on. However the majority of tax payers only make $60,000 per year.

The top earners, rather the top tax bracket, is 35% of that last value of income over the preceding bracket. The top bracket doesn't mean you pay 35% of everything you earned.

There were periods of years that the richest people we’re paying up to 80-90% in the very top marginal brackets.

After WWII the tax laws were paired down repeatedly, with the largest single tax cut coming from Reagan in 1986. He cut the top rate from 71% to 35%. Reaganomics.

While this was a great cut for the super rich, there was no comparable cut for the middle class or the poor; not in any way proportional to the staggering cuts for the rich.

Another major failing of this fable is it compares the rates of taxes and how that somehow applies to all of the men in the bar. It's not that simple.

Very few wealthy people actually pay the stated rate of tax. While everybody technically has the ability to use the following advantages, realistically only the super rich can access them to any significant degree:

1.) make claims for exemptions and deductions of all sorts and

2.) seek out the help of a tax lawyer, tax accountant, tax advisor, or a financial consultant.

Warren Buffett has said “My secretary pays more tax than I do” His secretary pays a tax rate of 35.8 percent of income the top rate, while Buffett pays a rate at 17.4 percent. Obviously his secretary makes over $150k per year. Even so, she can not afford to pay for or even need to seek out tax advisory expecting to lower her rate to 17.4 percent. This is something the very wealthy can and do, paying 30-50,000 dollars to save millions. Another quote from Buffett "There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning."

The last part of this story really doesn't make any sense to me. Most of the overseas locations that seem friendlier all have less of an income gap, better and cheaper healthcare, and longer life expectancy.

The ten guys are not realistic representation of an economic cycle.

It's not even a capitalist system which is being implied by the story. (each gets all he wants to drink irrespective of ability to pay.)

In realtiy the group would never actually pay the full tab because the deficit would increase the amount they owe the bar tender until he refuses to serve them.

Bringing in the 20% discount brings up the big question of the fairness of income gap and would result in bar fight brawl to the death or robbery of the man with the most money.

The rich entrepreneur takes the financial risks and creates the jobs that produce the goods, the "poor" man (woman) sells his talent and time and buys what the economy produces and the system thrives. I thought that the American ideal is to provide the foundation of opportunity. Capitalist right? The wider the divide between rich and poor, the less such opportunity exists. Things historically have gone wrong when the opportunity gap widens and the rich can shift their risk to the middle class and the poor.

Sometimes it's difficult to not to get caught up in the political hype. You've got the right fright puppets and the left dense zombies barraging people with inaccurate information and it only takes a clever piece to go viral. There's a lot of strengths this country has and it's primarily the working middle class which make up the majority of people. Obama has got some terrible policies. Yet taxing the rich is not one of them.

JB

Edited August 3, 2012 by Bolton Sign

[Snoochie]

Sometimes it's difficult to not to get caught up in the political hype. You've got the right fright puppets and the left dense zombies barraging people with inaccurate information and it only takes a clever piece to go viral. There's a lot of strengths this country has and it's primarily the working middle class which make up the majority of people. Obama has got some terrible policies. Yet taxing the rich is not one of them.

JB

Both the Democrats and the Republicans are different wings of the same bird. I refuse to be categorized as either.

I am a Blue Collar Middle Class American who makes up his own mind by diligent analysis and never along ridiculous party line ideology.

Both parties lie and basically suck in my little world. Those who love Romney will love him no matter what and hate Obama no matter what. Those who love Obama will love him no matter what and hate Romney no matter what. I choose to make up my own mind based on what I see.

Dominic

[eugene@signmakershc.com]

I guess I should have given this a different name. What I was trying to do is show how some people always want more than they are currently getting and always feel they aren't getting their fair share. Just like in our current tax system, there are people that complain that the rich aren't paying their fair share. A lot of those same complainers aren't paying any income tax, but receiving government benefits, get to drive on roads, send their kids to school, get fire & police protection & etc without paying for it. In my opinion it takes some big balls to complain that the people that are paying taxes aren't paying enough when you don't pay any. It is really easy to spend someone else's money. A truly fair tax would be a flat rate where everyone pays the exact same percentage. An even better plan would be a consumption tax, then if you spend very little and or save, you pay very little tax, if you spend more then you pay more. All that has been done to help the poor in this country over the last 40 years has NOT worked. We have a greater percentage of people considered poor than ever before. We have created a whole class of society that has never worked or intends to ever work that feels entitled to everything that people that work hard for a living has. As the government has taken more & more of what we earn for taxes the people on the bottom have less of their earned income to spend and can no longer survive on their own. They then have to start having help from the government and this problem just keeps getting bigger. The poeple that don't work for a living have too much time on their hands also causing the crime rate to climb. I believe that any able bodied person receiving government assistance should have to work 8 hours a day at somethingl This would cure a lot of things, obesity, poor self esteem, etc. Women on asistance whould also have to be on birth control that they have no control over, if you can't afford to take care of yourself & your family , you should not be able to add to that burden. It amazes me that some of the people getting govenment assistance need my help for basic neccessities, but can afford tattoos, piercings, smokes, alcohol, & drugs and $150 tennis shoes. Before Johnson's Great Society, the local churches and other groups helped the poor, every dollar they collected went to help the poor. With the government we are lucky if 10% of every dollar they collect for the "poor" actually makes it back to the people. Too many hands in the till, a lot of them making big money for jobs that others used to do for free. Before the government got involved these people were helped to find a job and encouraged to work, with an incentive for working. If you didn't try to help yourself they eventually would quit helping you. Now there is no incentive to work, you can do better staying on the government dole. But someday this will all end, there will come time when those footing the bill for all of this will no longer have enough money to fund all of those sucking at the government teat. You don't think that possible, look at Europe, that's where we are headed. As the government takes more & more of what we earn, more & more fall into the poor category and have to start assistance. This is not sustainable. If there is not fundamental change in this country we will cease to exist as a free society, and today we are well on the road to that end.

[Snoochie]

So let me ask you this key question, what specifically are you going to do to change it?

This is the problem. We write about it, whine about it and then just wait for someone else to do something about it.

Think about one other thing as well. Government was never meant to be run like a business and is doing just as it was designed.

In your travels as a business, when did you ever come upon an company that had a President that had to work to secure the majority agreement of 100 shareholders, some 425 plus other shareholders, an advisory body of 9 other folks who can void your decision if they could come to one, only to have the CEO void the entire framework if he doesn't like what was agreed on and then have to get a supermajority of shareholders to overturn that decision only to start all over again to get any decision enacted? Every decision every day. Name me a company that has that facing them. Oh and I forgot to mention that the whole process is controlled by two unions who have no interest in getting anything done for the workers of that company only lining their own pockets and pushing agendas that even the workers can't agree on. And, I forgot, no matter who the CEO or the rest are, 50% will hate either side no matter what.

Get used to the system, it was here before you came and hopefully will be here when you check out. That is, unless YOU decide to do something about it other than writing and whining.........

Dominic

[dfischer]

I just as well throw my two cents into this discussion.

The Dems and the Reps have very different ideas of the size of government. So, it is no wonder why nothing gets done.

We constantly argue over federal income taxes which isn't the problem. It is Medicare that will cause a financial crises. As most of you know medicare rates are 1.45% for employee and employer. If we what to argue over taxes it is the medicare tax that should be argued. Should we raise this tax? Raise the age requirement? Boles-Simpson address this in their recommendations. The short answer in my opinion is to adopt their plan. Now who's going to use their political clout to get the Plan enacted?

[Bolton Sign]

Boles-Simpson didn't have any support because it's 5 trillion in deficit reduction over 10 years goes against both parties long standing modi operandi. In other words, any member of congress who would support it would become a hypocrite due to it's conflict with their party's morals and dogma. That's not saying the tenets of the plan would not work to reduce the deficit, only the members of both parties don't work together.

BS, no pun intended, calls for more changes with income tax than Medicare, including changing marginal tax rates, eliminating the alternative min. tax, eliminating expenditures for income and payroll tax, reducing discretionary spending, and overall tax hikes. The argument Medicare will cause financial ruin is based on half truths and has incorrectly been used by both parties to increase the divide. BS is more about income tax as I read it back in 2010. I do recall the buzz of the media was hot with Medicare talk back then.

We the people don't constantly argue about much. Constituents of the extreme wings are so mired with propaganda there is no middle of the road for them. While the independent voter will decide which extreme is elected, it's more important to break the spell which holds the far left and right from actually thinking about what's being proposed.

Indeed, who has the clout to enact any level headed legislation?

[dfischer]

Until we have a viable third party we'll have to vote with what we have.

Party control in Washington goes back and forth. During the second Bush term the republicans had control until the mid term elections changed the majority House and Senate to democrat (people didn't like the war). Then Obama won election and he had a majority until the mid term, then the House became republican. (Tea Party) The people didn't like Obama's health care and other spending.

Medicare is in terrible financial shape. Social Security (SS) is in much better condition. The surplus of SS has historically been used to help finance the general budget spending, whereas medicare has been using general funds to pay it's bills.

Is Boles-Simpson a perfect plan? Probably not. But, at least it's a plan to enforce some financial discipline. The national debt is approx 16 trillion, in 4-5 years it will grow to 21-25 trillion depending on tax increases and cost control yet to be enacted. Because of the baby boom generation now coming of retirement age medicare expense will account for the largest portion of the increase debt.

The Country is broke so the question is, how much money is the federal government going to take from the private sector i.e. the people. The more they take the less capital (money) can be invested.

If you look at the taxes we pay now, state, fed, fica, property, sales, gas, and on and on the average worker is paying close to half of their earnings in taxes. This leaves less money for everyday living expenses never mind savings and retirement. Add inflation (purchasing power) into the mix we are becoming poorer. This is causing less capital (surplus) to invest in the economy to expatiation. Once the economy become stagnant then everyone has to spend down their savings (capital). It's a downward spiral from there. I have to conclude with taxation at it's current level it would be impossible to expand our economy with more taxation.

[signfabs]

Oliver Wendell Holmes said "Taxation is the price we pay for civilization".

Politicians always promise more (popular) without increasing taxes and charges (unpopular).

Mention a tax increase and you are crucified in the media (owned and controlled by people who could afford to share a bit more.)

A politician's main job is to get elected.

We are living beyond our means and would like to continue doing so.