Wednesday, March 18, 2009

common misunderstanding

Progressive taxes in America do NOT mean that all income for wealthier people is taxed higher. We have a bracketed system, which means that people in the top tax bracket are only taxed at the top rate on their income that falls above the top bracket minimum. For example, no matter how rich they are, a married couple would be taxed at the 10% rate on the first $16,700 they make. Any income they earn between $16,700 and $67,900 is taxed at 15%. Any income they have in the next bracket will be taxed at 25%, followed by 28%, 33%, and 35% for any income over $372,500.

For 2008, the Federal tax brackets for a single (unmarried) person are:

1) 10%: from $0 to $8,025
2) 15%: from $8,026 to $32,550
3) 25%: from $32,551 to $78,850
4) 28%: from $78,851 to $164,550
5) 33%: from $164,551 to $357,700
6) 35%: $357,701 and above

And here is the breakdown of American wages by household (not individual):

28.22% earn less than $25,000 per year
26.65% earn between $25,000 and $50,000
18.27% earn between $50,000 and $75,000
10.93% earn between $75,000 and $100,000
15.73% earn over $100,000
Just a small fraction earn millions

Monday, March 16, 2009

bar stool economics

Here is an interesting conservative story that's being forwarded around the internet. Below this one is my progressive rebuttal. The battle of the philosophies, made easy.

Bar Stool Economics

Suppose that every day, ten men go out for 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.
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 drank in the bar 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 beer by $20. Drinks 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 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 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 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,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I!'

'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 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, 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 drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.


###
###


Progressive version:

Suppose that every day, ten people go out for beer. A lot of beer. If they paid their bill the way fiscal Conservatives WANT us to pay our taxes (21% rate for everyone, which would amount to an enormous tax reduction for the richest and the largest tax increase in history for the poorest), it would go something like this:

The first four people (the poorest) make $50 a day and would pay $11.50, leaving them with $38.50 to survive.
The fifth makes $200 a day and would pay $42, leaving her with just $158.
The sixth makes $300 and would pay $63.
The seventh makes $400 and would pay $84.
The eighth makes $500 and would pay $105.
The ninth makes $1,000 and would pay $210, leaving her with $790.
The tenth man (the richest) makes $10,000 and would pay $2,100, leaving him with $7,900.

So, that's what they decided to do. The ten people drank in the bar every day under this arrangement. The poor had to sacrifice birthday gifts for their children and healthcare for one member of their family in order to buy that beer. The wealthy still enjoyed their healthcare, college, 401k retirement savings, their gated home and clean and healthy organic lifestyle, and their yacht, but they couldn’t afford a second yacht because of that beer!

One day, the bar owner threw them a curve. Instead of paying 21% of their income each for the beer, they could each pay 15%! The bar owner proceeded to work out the amounts each should pay.

And so:

The first four people (the poorest, most strapped for cash) save $3 (6% savings).
The fifth saves $12 (6% savings).
The sixth saves $18 (6% savings).
The seventh saves $24 (6% savings).
The eighth saves $30 (6% savings).
The ninth saves $60 (6% savings).
The tenth saves $600 (6% savings).

Each of the people had more expendable income than before. But while the poorest struggled to buy just one additional teddy bear for the new baby with the savings, the rich saved enough that they actually could afford that second yacht after all! In fact, they saved many times the sum of the poor people’s income, and that was just their savings!

However, despite the additional income, not everyone was better off. Even though the beer was cheaper, the healthcare assistance for the poor disappeared, the public transportation system in America deteriorated, the country could no longer invest in medical research or fund job training centers or police stations around the country. So, in actuality, the poor, who were the financially worst off to begin with, became even worse off, despite the extra $3 bucks a day they saved. Working class people also happen to represent the majority of America. Despite the crumbling surrounding community, the small rich minority were astronomically better off! Their healthcare rates didn’t change, they kept their Lexus, they could still afford college, and although they decided against buying the second yacht, because, why would you need two?, they were able to throw even more money into derivatives!

And that, boys and girls, journalists and college professors, is how our fiscal conservatives want our tax system to work. Everyone pays the exact same percentage of their income in taxes, the people who pay the highest taxes are the only ones to benefit from a tax reduction, while the poor, struggling to get by to begin with, struggle even more regardless of whether taxes go up or down.

No one is attacking anyone for “being wealthy,” as some assert. (I wish I were rich, and I certainly wouldn't complain about my taxes if I were.) But the rich got rich in America, on the shoulders of their working class employees and using the infrastructure the working class have built and the security and structure America provides. Numerically equal tax rates do not amount to equal burden. It does not amount to "fairness." It utterly ignores the common good, and it is the antithesis of equal opportunity. The world just don’t work that way.

Nobody Special
University of New Hampshire alumnus
For those who understand, no explanation is needed.
For those who do not understand, just think about it. You’ll get there. Doesn’t take a PhD, just some perspective.