Friday, October 17, 2008

Periodic Politics, part 2



After reading some inane arguments about voting for McCain in order to support the economy over on that bastion of thoughtful conversation, MyLocalLineup, I decided to hunt down this gem that I remembered from my Public Education (how socialist of me!). Original text found here.

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 who are 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.

This next bit is the good part!

Here's what it looks like with some additional relevant information, specifically the men's income and total cost of beer relative to their income:

The first 4 men make $8 a day and their beer costs them $0.80 a day. They still have $7.20 in their wallet afterward (90% of their income).
The fifth man makes $32.55 a day and his beer costs $4.48 a day. He still has $28.07 in his wallet (86.2% of his income).
The sixth makes $78.85 a day and his beer costs $16.06 a day. He still has $62.79 in his wallet (79.6% of his income).
The seventh makes $164.55 a day and his beer costs $40.05. He still has $124.50 in his wallet (75.7% of his income).
The eighth makes $357.70 per day and his beer costs $103.79. He still has $253.91 in his wallet (71% of his income).
The ninth makes $800 per day and his beer costs $258.60. He still has $541.40 in his wallet (67.7% of his income).
The tenth man makes $5,000.00 per day and his beer costs him $1,728.60. He still has $3,271.40 in his wallet (65.4% of his income).

Overall, the bartender makes $2154.78 each day.



So, one way to look at it is "The first four men only paid 80 cents for their beer while the tenth man paid over $1700 for his beer. That's completely unfair!"

Another way to look at it is "At the end of the day, the first four men only have $7.20 left in their wallet but the tenth man has nearly $3300 left in his wallet. Even though the tenth man is paying a lot more for his beer, his wallet is still awfully fat when he leaves the bar."

I think the most interesting thing though is the plight of the guys in the middle, specifically the sixth man. Everyone is paying roughly 4% more of his total income than the previous guy except for the sixth man, who is paying nearly 7% more than the fifth man.

So let's adjust the numbers again and make everyone pay 4% more than the guy in front of them, except for the 9th and 10th men who will pick up the burden of paying 7% and 9% more than the 8th man, respectively (in other words, let's simulate a rough version of Obama's tax plan):

The first 4 men make $8 per day and their beer still costs them $0.80 per day. They still have $7.20 in their wallet afterward (90% of their income).
The fifth man makes $32.55/day and his beer costs $4.56/day. He still has $27.99 in his wallet (86% of his income).
The sixth man makes $78.85/day and his beer costs $14.19/day. He still has $64.66 in his wallet (82% of his income).
The seventh man makes $164.55/day and his beer costs $36.20/day. He still has $128.35 in his wallet (78% of his income).
The eighth man makes $357.70/day and his beer costs $93/day. He still has $264.70 in his wallet (74% of his income).
The ninth man makes $800/day and his beer costs $264/day. He still has $536 in his wallet (67% of his income)
The tenth man makes $5,000/day and his beer costs $1750/day. He still has $3,250 in his wallet (65% of his income).

Overall the bartender makes $2165.15 each day.


So what did we learn from this exercise? The first 5 men (i.e the lower classes) pay pretty close to exactly what they were paying before. The sixth, seventh, and eighth men (i.e. the middle and upper-middle classes) all pay between 9.6% and 11.6% LESS than they did before. Only the 9th (i.e. rich) and 10th (i.e. ultra-rich) are paying more than they were before and they are only paying 2.1% and 1.2% more, respectively. Also notice that the bartender (i.e. the Federal Government) is making half of a percent more than he did before!

By the way, translated into real dollars, the ninth man makes $800,000 a year, the tenth man makes $5,000,000 a year. Just move the decimal place three spaces to the right to see how actual income matches up. How many people do you know who would qualify as an eighth, ninth, or tenth man? How many of them seem on the brink of insolvency due to the progressive tax system? Conversely, how many of you are fifth, sixth, or seventh men (i.e. make between $32,550/year and $357,699/year)? How well are you making ends meet in today's economy?

So please explain to me again why trickle-down economics are good for everyone. Because I'm sure as hell having a hard time swallowing that particular conclusion.

Also, as an aside, a progressive tax system is NOT Socialism. Socialism is when your Government buys a controlling interest in your entire banking system. So if you support a government bailout of the financial institutions, you support Socialism by definition.

So what did we learn here today kids?
1) Trickle down economics suck unless you're making a ludicrous amount of money.
2) Relieving the tax burden on the middle class helps the people who need it the most.
3) Sending poorly researched and erroneously attributed mass forward emails to me is a bad idea unless you want to get publicly called out for your faulty data.


From conservatives for Obama.

9 comments:

ryan said...

yer one of dem skool techer eleetist ain't cha?

asmith said...

Ryan, I think what you meant to say was. "Your won of thoas scool teesher eel eat ists, ate ya?"

Consider it a free lesson.

Stephen Tiano said...

Thanks for the birthday gift!

I happen to be believe in capitalism. Real capitalism, not handouts for the wealthy. The way wealthy people are treated like an aristocracy with all kinds of special tax benefits that keeps them elevated from the other 97% or so of us, that’s what’s un-American, dammit!

JP St. Pierre said...

Good stuff.

leo said...

america seems to have become un american if you exersise free speech other than to agree with the administration you are held up to be un american. Guys this country has seriously lost its way when you can no longer crit the powers that be

rob70 said...

Ok, that sounds great, and forgive me if I'm not understanding it correctly, but is the tenth man really paying that 35%?

Warren Buffett recently stated that he paid less percentage of taxes than his secretary: 17.7% on 46.6 million.

http://www.timesonline.co.uk/tol/money/tax/article1996735.ece

What gives, loopholes?

Danny said...

Buffet's money is taxed at the capitol gains rate because he only draws a salary of $100,000 I belive (correct me if I'm wrong) so all that other money (capitol gains income) is taxed at just 15%. All his earnings are in stock, which make him a little more of an anomoly when it comes to taxation and peoples perceptions.

A humourus surface observation and comment on government spending, the ten guys are paying the bartender (fed) over two grand for ten beers?

oscar said...

Right, and now you are unpatriotic if you don't want to pay more if you make more. The only "fair" tax is a flat rate. All the complaints by liberals about rich people not paying "their fair share" and not once do you hear them call for eliminating regressive sales taxes or sin taxes which have a huge percentage-of-income impact on "non-rich" people. Obama's "tax the rich", "let's spread the wealth around" Robin Hood rhetoric sounds great in an election year, if you want to stir up class warfare and get votes from ignorant people. No matter how you cut it, a tax increase is contractionary fiscal policy, and a bad idea in a down cycle.

Anonymous said...

Does class warfare equal the 83% of people who would get a tax cut versus the 17% who wouldn't?