A bit on Taxes – Why taxes and welfare are bad (Part 2)

A good friend sent me the following story, which illustrates how taxes work in America;

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, 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 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.

This example shows why two more of the popular phrases are not as good as they sound. My favorite, because it is so obviously arbitrary it betrays the ignorance of those who repeat it, is that they should pay their fair share. For the love of all that is holy, before my mind explodes in frustrated agony, can someone explain to me how someone paying more money and a higher percent of their income is fair? I’ve read many definitions for the word ‘fair’ and none of them indicate specifically differing treatments based on income. Let’s return to some of our earlier figures. The top 1% own 50% of the wealth. So maybe they should pay 50% of the taxes? Wealth includes things they own, like shares in businesses, or large properties, or simply a glut of liabilities that yield no income. Many of those things have their own taxes, like property taxes and luxury taxes, so simply paying on their wealth isn’t right. When it comes to income the top 1% earn about 21.2% of America’s income. Maybe they should pay 21.2% of the taxes, because that would be fair. So how much do they pay?

New data released by the IRS offers interesting insights into the distributional spread of the federal income tax burden, new analysis by the Tax Foundation shows. The new data shows that the top-earning 25% of taxpayers (AGI over $62,068) earned 67.5% of the nation’s income, but they paid more than four out of every five dollars collected by the federal income tax (86%). The top 1% of taxpayers (AGI over $364,657) earned approximately 21.2% of the nation’s income (as defined by AGI), yet paid 39.4% of all federal income taxes. That means the top 1% of tax returns paid about the same amount of federal individual income taxes as the bottom 95% of tax returns18.

So they earn 21% of the income, and pay 39.4% of all the federal income taxes. The top 1% pays as much as the bottom 95%, and they need to pay more for it to be fair? Actually, the bottom 40% pay nothing, nothing, in income taxes. Anyone making more than $43,200 a year is in the top 40%, and the top 40% pay 99.1% of the federal income taxes. The next 20% pay 0.9%, and the bottom 40% pay nothing. Income tax is not the only tax of course. There are also luxury taxes, inheritance taxes, gas taxes, property taxes, etc. Who do you think is paying the most in luxury taxes? Who do you think is paying the most in property taxes? But that’s still not fair? The top 1% need to pay more? That is definitely the drunk, lunatic ravings of a group that have been getting free beer (welfare, medicaid, medicare, unemployment benefits, libraries, military protection, public schools, roads, etc.) for too long, and now think they should be paid to drink.

If you want a fair tax, everyone should pay the same percentage of their income. The rich would still pay more, the very rich would pay the most. If you think a progressive tax is right, that’s certainly your prerogative. But don’t delude yourself or try to deceive others by calling it fair.

The next thing I would like to point out is that increasing the gap between the rich and poor isn’t inherently a bad thing. In our previous example the tax cut gave the wealthiest $10 back, and gave the next groups less. The gap between the wealthy and the poor increased, but every one was better off. For the sake of the cynical, the four that weren’t paying anything didn’t get anything extra directly from the refund, but now the wealthiest has an extra ten dollars to spend. He might spend it at a restaurant where one of the poorest works, or he might do some extra clothes shopping where another one of the poorest works. Or he might invest it in a new business that needs new employees, which pays better than the restaurant or clothing store. The wealthiest, with his tax refund, is not going to take that money and put it in a lockbox; he’s going to spend it or reinvest it, which helps the economy, which in turn helps the poorest people. Sometimes it is in very helpful ways, like investing in a business that creates jobs. The government confiscating money so they can send people checks doesn’t create new jobs.

I also wonder who would consider it bad if both incomes increased. Lets say a wealthy person is making $50,000 a year, and a poor person is making $15,000. The economy gets better, and they both start making more. The poor person starts making $20,000 and the rich person starts making $60,000. The gap has increased; the rich person is making $5,000 above what used to be the difference. So, all the outrage is over the gap increasing. Do both parties want to go back to their original salaries in order to decrease the gap? Of course the rich person doesn’t; all rich people are selfish and greedy. Do you think the poor person wants to go back to making $15,000 because he’s so outraged that the gap between the rich and poor has increased? Redistribution decreases the gap by keeping the highest earners down, not by allowing both to grow. You can take billions from the wealthiest, and it will only help individuals by a little bit because there are millions of people in America to redistribute to. So they all have a tiny bit more; it doesn’t change their status, it doesn’t make them wealthy, it doesn’t give them a higher salary. It might even bring their salary down if the owner of their business lost enough that he has to start cutting expenditures. All the other companies are going through the same thing, and so prices go up. Does your $500 government check do you any good if you have to increase your food budget by $1000? The end result is that everyone has less. But the gap has decreased, so the liberals are happy.

Now let’s play a quick little game. If you had a million dollars, what would you do with it? Would you build your dream house? Would you take a trip to Europe? Would you put it in the bank so you could send all your kids to college? Decide what you would do, then keep reading. I remember when I was young dreaming about what I would do with a million dollars. I would give some of it away; I had a mental list of my closest friends who would just get several thousand apiece. (If they had a million dollars, I would hope they would give me something, so why shouldn’t I share it too?) I would put some in the bank for my kids, buy a decent house, then go on a nice vacation with my husband. Most of the million dollars would be gone, but I would have everything I wanted. Then I got a bit older, and realized it would be smarter to put it in the bank. I could easily get 7-8% interest on a million dollars, and I could easily live off $70,000 to $80,000 a year.

Now I know there are much smarter things I could do with my money. What do you think the richest people in America do when they get a million dollars? Do you think they spend it or stick it in the bank? No way! They invest it. If Donald Trump gets a million dollars, he invests it. If Warren Buffett gets a million dollars, he invests it. George Soros, Bill Gates, anyone who has millions or billions of dollars got there because they invested their money. If they weren’t smart enough to know what to invest in, they paid someone else to invest it for them. You can not name ANYONE in the top 400 richest Americans who doesn’t invest their money. After they have made millions of dollars off their investments, then they spend their money.

Let me explain how it works. Let’s say I have a million dollars, and I want to buy a nice house. I could spend that money on the house I want. Once I spend the money it will be gone. I would have a house, but I wouldn’t have a million dollars. That is what 90% of Americans would do, which is why they are in the bottom 90%. So, instead of spending the money on a house I could invest it. I could invest in real estate. I could use my one million dollars to buy five duplexes for $200,000 apiece; I could rent each unit for $700 a month, and every month I would have an income of $7,000. A 30-year mortgage on a $1,000,000 home at 6% interest is $5,995 a month. So, you would be able to pay your mortgage every month and still have an extra $1,000. You would also have five duplexes, worth at least $1,000,000. You would have your million dollar house, and you would own property worth a million dollars. You could put the extra $1,000 a month into paying off your mortgage early, or you could play with it. Or you could reinvest in something else. Once your dream home is paid off you have $7,000 a month, for nothing! You could have spent the $1,000,000 on the house up front, but you invested it instead. You still got what you wanted, but now you have a monthly income and five duplexes you can sell whenever you want. Do you see the difference?

The fabulously wealthy are wealthy because they know how to use money. They know how to make money work for them. When they get money they use it to make more money. When poor people get money they spend it on things they want. That is the number one reason why redistribution is a bad idea. When the rich have money they create more money; and I hope by now you realize that more money is always a good thing. When you take money away from the wealthy they can’t use that money to make more money, so the net result is less money. The poor get the money, they spend it on liabilities, and it’s gone.

Which is why it doesn’t bother me that some people are fabulously wealthy. I will never be one of them, I’m not smart or brave enough to know what to invest my money in to become a billionaire. But it doesn’t bother me that some people out there have personal jets, spend hundreds of dollars for dinner at gourmet restaurants, own penthouse suites, have butlers, maids and cooks, wear million dollar jewelry and travel to Europe for the weekend. It doesn’t bother me because I know every cent they spend is going to someone who has less than they do. It doesn’t bother me because I know they are invested in companies that provide jobs and salaries to countless people. It doesn’t bother me because I’m happy with my life; I like not being responsible for the performance of a company, it means I don’t spend my days working every waking minute and stressed out. I like having a small apartment because it’s less to clean. I don’t mind walking different places because I feel like I’m getting exercise. I don’t mind that I’ve never been to Europe. When my husband and I have saved enough to go on a nice vacation we will appreciate it that much more, and it will provide fabulous memories for the rest of our lives. I didn’t mind my parents not being able to afford a fabulous, expensive private school for me, because I knew I could study and read on my own and perform well enough to get into the college I wanted to go to. I don’t mind that our monthly date is usually at Arby’s, because I really like their roast beef sandwiches. I don’t mind that the first car my husband and I had was a 1996 Honda Civic Hatchback, because it got really good gas mileage. I didn’t mind not having a car until we were pregnant with our first child, because we could take the bus everywhere and we didn’t have to worry about insurance, gas and the registration costs. I wouldn’t be any happier if all the rich people in America were suddenly poor, and neither would anyone else. They might feel vindicated, they might feel like everything was fair, but they would not be any better off.

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About whyimconservative

I'm a stay-at-home, homeschooling mom with a Biochemistry degree living in Austin. I love my kids, my husband and my country. I want to explain why I'm conservative.

Posted on June 6, 2011, in Why Taxes and Welfare are Bad and tagged , , , , , , , , . Bookmark the permalink. 4 Comments.

  1. I unfortunately just wasted about 15 minutes writing a response only to have it garbled in the text box when attempting to paste a source in context.

    Suffice it to say, “jealousy”, as you’ve posited, is certainly one means by which to critique the wealthiest sector. But it’s not the most compelling. “Capitalism”, actually, is the more compelling argument. Consumers getting an exceptionally raw deal, while illicit profits stream ever-exponentially upwards and blue-
    collar salaries stagnate.

    We are living in a time of extreme financial disparity— and that reaks hazard on the fundamentals of a capitalistic consumer-driven economy.

    “And as Warren Buffet, one of America’s most successful capitalists and defenders of capitalism, points out:
    There’s class warfare, all right, but it’s my class, the rich class, that’s making war ….
    And as I have previously noted, radical concentration of wealth actually destroys capitalism, turning it instead into socialism for the rich.”

    http://georgewashington2.blogspot.com/2010/12/extreme-inequality-helped-cause-both.html

    And note: wealth within this country is now so disparately spread, it mirrors the Great Depression. That should raise the hackles and issue cause for concern.

    Pamela, go to that source, and thoroughly give it a read. It speaks to many of the things I’d originally composed before my post was mangled beyond salvation.

    The middle class has not gotten ever-more-increasingly lazy, has not had exponentially more-unsustainable dreams for a modest, humbling life of hard work and self-respect. House, lawn, garden, 2.5 kids, dog, cat, bird, perhaps even college. But those seemingly conventional dreams have slid further and further away from practical achievability— not by sloth— but by design. I do not begrudge John McCain 12 homes and 37 cars. I do begrudge an economic system in which the Wall Street derivatives traders received bonuses after perpetrating the greatest strike to our financial system in a century.

    From the same source:
    “Is There a Causal Connection Between Extreme Inequality and Economic Crises?
    More to the point, most mainstream economists do not believe there is a causal connection between inequality and severe downturns. But recent studies by Emmanuel Saez and Thomas Piketty are waking up more and more economists to the possibility that there may be a connection. Specifically, economics professors Saez (UC Berkeley) and Piketty (Paris School of Economics) show that the percentage of wealth held by the richest 1% of Americans peaked in 1928 and 2007 – right before each crash:” (enter data graphs, etc.)

    The systemic economic disparity currently dissembling our consumer-based capitalist system— deserves more studied concern than the mere contention that it’s envy of the “have nots” responsible for the impression that the disparity exists.

    You’re a talented writer, and it’s a serious topic. The standard litany of talking points about “re-distribution of wealth” — most of which you’ve avoided, but the underlying critique of “envy as compelling argument among the have-nots” remains—- do no credit to the seriousness of the issue.

    • I think I’m done for the day; I have a lot to get done, and I would like to read through your links before responding to anything else. I never say the middle-class has gotten lazy. I don’t believe that at all. I don’t think the ‘rich’ are out to get anyone. I don’t think it makes any sense; what benefit is there to having a poor class? The poor I live around are destructive, vandalous, noisy, ask me for money literally every time I leave my house, leave needles and spray dirty words and pictures on the nearest playgrounds I would take my children to, and a litany of other things that I would never do and would prefer simply didn’t exist in this world. I would much rather have everyone work hard, graduate from high school, go on if they wish, learn to respect others and property and be self sufficient. Not least of all because then I wouldn’t be paying for their health care, food, welfare, housing and such for the rest of my life. But also because I sincerely believe that it is better for individuals to work hard and accomplish something with their lives. I think it’s a sad, corrosive lifestyle to live leeching off the work of others. Giving them everything they have does not improve their station and teaches them not to value anything, which is evident in the way they destroy their homes and property. Anyone who believes that the poor have been forced into their station should spend some time living where I live; southwest Chicago proper. I am surrounded by ‘the poor’, and all my personal observations are that they are in that station because of personal choices. The woman I reference multiple times certainly chooses to do nothing and as a result can do nothing for herself. I go to local libraries with my children. Almost every time I walk in literally every computer is full of children and adults playing games or surfing facebook, while the rest of the library is empty. They have books available, they could choose to read and better themselves and improve their value as a potential employee or student. Instead they fetter their time away. Where one ends up in life is a culmination of choices. When people choose not to work and study, they will have nothing of value to contribute to society. The wealthy have nothing to do with those choices. On the other hand, a young black girl in my church recently left for college. She came from a single mother home in a bad neighborhood. The rest of her family is living the typical poor class lifestyle. She choose to work hard through high school, take the ACT, apply to colleges, and got in. She is no different that the people she grew up around, she just made different choices. Why would the wealthy want to perpetuate a poor class?
      Some claim that the wealthy take from them. Take what, exactly? What do the non-working welfare recipients have to take? The one selfish act you begrudge was a result of government policies that allowed the worthless mortgages to accumulate false value. They stole from the taxpayers, not the poor, and that was only because the government set it up to allow that.
      Let me know what talking points I avoided. I do not understand your last paragraph, but if it’s an intriguing topic I will research and address it in a future post.

  2. (on a side note— a comment at The Hill I wrote responding to your “Can anyone name an industry the government has gotten into, and improved? USPS? Public schools? Mortgage industry? How could we have let them get involved in our health care?!” just got gobbled by The Hill Monster)— though this is article above is not the appropriate topic to address that issue, I would like to take the chance to address your question.

    Can anyone name an industry the government has gotten into, and improved?

    Easily, gladly: Food Safety. The government was actually implored to enter and regulate food safety at the start of the last century— BY business. By businesses who were trying to do right by their consumers. By businesses that cared about food safety, about not spreading disease— but who worried about being priced out of the market by less scrupulous competitors who would sacrifice health safety (and their customers’ lives) for quicker profits.

    http://thehistoricpresent.wordpress.com/2009/08/19/the-fda-and-government-regulation-of-food-safety/
    (another fascinating study I’d advocate you give a thorough read, if solely for entertainment value)

    On that point, a striking parallel develops: with specific regard to the illicit profits and monopolistic reality of health insurance, pre-HR3590. The indirect parallel strongly indicates that an actual public option for health insurance would actually AID the health care markets, and make the consumers’ might in health insurance more commanding.

    Large health insurers held monopolies in 13 states.
    http://www.marketwatch.com/story/study-confirms-health-monopoly-fears

    Great Depression era legislation exempted health insurers from monopoly-prevention provisions with the enactment of the McCarran-Ferguson Act of 1945. HR3590, the ACA, rescinded that.
    http://www.opednews.com/articles/Health-Insurance-Monopolie-by-Jerry-Policoff-091228-669.html

    But, even as evidence throughout the 18-month debate over health reform came to prove, health insurers lied before Congress about the benchmarks guiding their pricing. Internal emails betrayed that massive increases on policies were requested— not to offset business costs—- not to cope with inflation— solely to increase quarterly profits to a specific percent. Consumers got a raw deal. An actual public option, like food safety laws ensuring that food manufacturers who properly ensure the safety of their products— would strongly indicate a lowering of health insurance policy costs— deflating the falsely inflated prices, forcing the health insurers to actually compete for consumers’ business.
    http://www.law.berkeley.edu/files/chefs/Public_Option_Economic_Analysis.pdf

    And I’ll gladly state this: I would advocate strongly that a stalwart public option be available— and I would want absolutely zero people ever to elect to purchase it. I would that the health insurance industry take competition so seriously— they compete so hard for their customers’ business— that a public option would pale in comparison. Instead of people being pillaged by their insurers, aware or unaware of the unconscionable record profits that insurance giants reap whilst screwing their consumers wholesale.

    http://abcnews.go.com/Health/HealthCare/health-insurers-post-record-profits/story?id=9818699

    • To be intellectually honest here, the question, “Can anyone name an industry the government has gotten into, and improved?” goes on to cite the Post Office, Public Schools and the Mortgage Industry — where each of these is an example of the government actually participating in those respective “marketplaces.”

      This is where the crux of the argument is: whether the government can improve an enterprise (that is clearly outside of its core constitutional power—the military doesn’t count) without continually requiring massive subsidization or continually destroying potential, future wealth (as is the case for many poorer children trapped in the government-run education system).

      Your one example of evidence the government can improve something is of a regulating body, not a state-run business. When the government shows it can run — with government workers (a la the DMV) — a raw sushi restaurant without continually sending people to the hospital with food poisoning I will consider your argument as valid.

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