01 April 2007

Tax Cuts for the Rich: In favor

Do you believe liberal propaganda about President Bush's "tax cuts for the rich?" (or any other conservative-proposed tax cuts) We understand. Tax math is complicated. We submit, therefore, this very simple tax parable to help you, dear reader, understand Democratic demagoguery and see it for what it is--rubbish.

Hat tip: Matt Lybbert
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.
Next time you read the NYT, or hear your socialist friend spouting off about the oppression of the common man by the rich of America, well, you'll know better, and be able to set her straight.


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6 comments:

Anonymous said...

that is really good and bound to bother some people

Justin said...

Shame on you Jake! As a recent taker of the LSAT, you should recognize the weak and fallacy-ridden argument you are pushing with this juvenile parable. It is fitting that it follows a political cartoon.

We agree that with all things being equal, lower taxes are far superior to higher taxes. The oversimplification of the very real dilemmas of taxation (or tax breaks) may appeal to the Rush Limbaugh bumper-sticker-attention-span crowd, but On Life or Lybberty should shoot for a more thoughtful stance.

F. Hayek said...

Justin,

According to you, on what fallacy or fallacies is this parable based? Or is it enough to simply dismiss it as Rush-eque?

I'm sure Jake appreciates you holding him to a higher standard. However, no less an authority than Dr. Gregory Mankiw, professor of economics at Harvard, author of the most popular university level econ textbook, and former chair of the President's Economic council posted this parable on his blog.

According to my reading and understanding, and Dr. Mankiw's, it seems an apt comparison to current discussions about tax policy and leftist inspired class warfare. Or maybe that's why you don't like it, because it lays bare the ridiculous position held by class warriors?

Justin said...

f,

Let's go around the room and see if we can find any fallacies. Ooohh, I've got one! How about comparing social justice and equity to drinking beer? You mean to tell me that the benefits of giving beer to the lower classes don't flow back to the wealthy? Oh yeah, that's education and crime prevention, not beer.

Now see if you can find one! Maybe you should ask Mankiw to help- he seems smart enough.

Class warfare? Get over it. I'm not opposed to tax cuts and I don't need this simplistic metaphor to show me how percentages work (although the more dense readers may find it engaging, even without pictures). Other than that, the parable taught me nothing about the longstanding dilemma and tradeoffs of taxation and distribution.

A more interesting parable might tell the story of an eager young student whose college education was funded by the humble religious donations of individuals who earn less than his parents. He then goes on to rail against socialism in any form. The end.

F. Hayek said...

aren't his parents indirectly funding the same education? or don't your percentages work that way? if they're so much wealthier, doesn't it follow that they would contribute an amount commensurate to their earnings--and, greater even than the cost of his education?

please, justin, think through things before you type them into the comments section of jake's blog.

Justin said...

We can't say whether this unknown individual's parents give an amount equal to what he takes from the pot. That's the power of a collective effort. But he's still benefiting from a social system that redistributes wealth in his favor, regardless of his parents' donation. He gets this simply by being a member. You can draw your own lines from there.

I agree though- my parable was pretty weak too.

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