I got a forwarded email originally written by an economics prof, explaining how Bush’s tax cut is not a cut for the wealthy. Using a restaurant analogy he argues that people who spend more get more money back when there is a refund.
However, this is not an accurate picture of Bush’s tax plan. A nonpartisian study found in August that the tax burdon was shifted to the middle.
The conclusions are stark. The effective federal tax rate of the top 1 percent of taxpayers has fallen from 33.4 percent to 26.7 percent, a 20 percent drop. In contrast, the middle 20 percent of taxpayers – whose incomes averaged $51,500 in 2001 – saw their tax rates drop 9.3 percent. The poorest taxpayers saw their taxes fall 16 percent.
The CBO study, due to be released today, found that the wealthiest 20 percent, whose incomes averaged $182,700 in 2001, saw their share of federal taxes drop from 64.4 percent of total tax payments in 2001 to 63.5 percent this year. The top 1 percent, earning $1.1 million, saw their share fall to 20.1 percent of the total, from 22.2 percent.
Over that same period, taxpayers with incomes from around $51,500 to around $75,600 saw their share of federal tax payments increase. Households earning around $75,600 saw their tax burden jump the most, from 18.7 percent of all taxes to 19.5 percent.
However, the restaurant analogy that was presented was a little limited.
In a better analogy the restaurant would be a cooperative venture by a community of people, who rely on it mostly for their meals. The people are not willing to eat nothing, so they demand some sort of satisfaction from their restaurant. Thus the community of people hires a manager to run the restaurant as a reasonable service to the community. Now the last restaurant manager was hired mainly on the support of the wealthiest members of the community, who didn’t like having to pay so much for their meals. To satisfy his backers the manager decided to cut prices and return the savings of the restaurant to the community.
He then decided that the next town over was harboring bad cuisine, and needed his community’s food exported to them. So he begins to build a new restaurant in the next town. It costs a lot of money to build the new restaurant, and the original restaurant is not bringing in as much money as it used to because of the price cuts, and its savings are gone because of the refund. To fund the new construction, the manager begins to borrow a lot of money, sinking the restaurant deeper into debt. However, that is not enough. So the manager decides to cut costs and lays off wait staff, closes the bar, switches to cheap ingredients, eliminates most menu items affordable by poor people, etc.
The poor members of the community have few options left on the menu and they are worse off then they were under the previous manager because they got little by way of a refund to offset the cuts in their services. The middle class members of the community did get some part of a refund, but their food doesn’t taste as good as it used to. The wealthy members of the community are okay with the situation because the money they got back is more important that decent dinning.
So the restaurant faces a situation: rising debt, rising costs, less revenue, and increasingly unhappy customers. The manager is unable to improve the situation because he cannot identify a single mistake he made in running it. Now the question left with the customer-owners is whether they renew the contract of the cut-and-spend manager or hire someone different.
What type of restaurant will they leave to their children?
PS You can read the actual forward in the Extended Entry.
Sometimes politicians, journalists and the liberal left exclaim; “It’s just a tax cut for the rich!” and it is just accepted to be fact.
But what does that really mean?
Just in case you are not completely clear on this issue, I hope the following will help. Please read it carefully.
Let’s put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for dinner 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 ate dinner in the restaurant 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 meal by $20.” Dinner 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 eat 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 eat their meal.
So, the restaurant 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 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 eat 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 me!”
“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 dinner, so the nine sat down and ate 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 eating overseas where the atmosphere is somewhat friendlier.
