apathoid
Topic Author
Posts: 887
Joined: Fri Sep 28, 2001 3:19 pm

### What The "tax Break" Really Means...

Dinner for 10: A Taxing Analogy

T. Davies, professor of accounting at the University of South
Dakota, explains the impact of tax reduction through a remarkably
understandable analogy that is both entertaining and informative.

"This is a very simple way to understand the tax laws," says
Professor Davies. "Read on, as it does make you think!" Here's his
analogy:

"Let's put tax cuts in terms everyone can understand. Suppose that
every day, ten men go out for dinner. 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 \$7, the eighth \$12, the
ninth \$18, and the tenth man--the richest--would pay \$59.

"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 (in tax
language a tax cut).

"'Since you are all such good customers,' he said, 'I am going to
reduce the cost of your daily meal by \$20. So now dinner for the ten
only cost \$80.00.

"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--the paying customers? How could they divvy
up the \$20 windfall so that everyone would get his 'fair share?'

"The six men 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 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 paid nothing, the sixth pitched in \$2, the
seventh paid \$5, the eighth paid \$9, the ninth paid \$12, leaving the
tenth man with a bill of \$52 instead of his earlier \$59. Each of the
six was better off than before. And the first four continued to eat

"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, but he, pointing to the tenth. 'But he got \$7!'. 'Yeah, that's
right,' exclaimed the fifth man, 'I only saved a dollar too; it's
unfair that he got seven times more than me!'

'"That's true,' shouted the seventh man, 'why should he get \$7 back
when I got only \$2? 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 he
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, a little late
what was very important. They were FIFTY-TWO DOLLARS short of paying the bill!

"Imagine that! And that, boys and girls, journalists, and college
instructors, is how the 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 at the table anymore.

"Where would that leave the rest? Unfortunately, most taxing
authorities anywhere cannot seem to grasp this rather straightforward
logic!"

T. Davies
Professor of Accounting & Chair,
Division of Accounting and Business Law
The University of South Dakota

KROC
Posts: 18919
Joined: Mon May 08, 2000 11:19 am

### RE: What The "tax Break" Really Means...

Classic post. Too bad the tree bangers around here are going to come in, start crying, and ruin the thread.

We're Nuts
Posts: 4723
Joined: Sun Jun 04, 2000 6:12 am

### RE: What The "tax Break" Really Means...

Great, let me know when someone actually wants to try that sort of tax cut.
Dear moderators: No.

JetService
Posts: 4611
Joined: Mon Feb 21, 2000 1:12 pm

### RE: What The "tax Break" Really Means...

I know I'll get raked over the coals for this, but personally, I don't think I pay that much federal income tax as a middle-class homeowner with a family. I just did my taxes last week and I was pleasently suprised at my refund. After itemizing all my deductions and credits, I'm only paying 5% of my gross income. Any tax-break for me is gravy. If I get a \$100 cut while some wealthy dude gets \$2,000, I'm not complaining. Makes perfect sense to me and seems fair enough.

mbmbos
Posts: 2662
Joined: Sat May 27, 2000 4:16 am

### RE: What The "tax Break" Really Means...

What can I say? It's a trite, simplistic and not particularly accurate analogy.
"If I don't manage to fly, someone else will. The spirit wants only for there to be flying. As for who happens to do it, in that he has only a passing interest."
- R.M. Rilke

apathoid
Topic Author
Posts: 887
Joined: Fri Sep 28, 2001 3:19 pm

### RE: What The "tax Break" Really Means...

A typical reply. Care to elaborate on how exactly you disagree with this post instead of taking a mindless shot?

N202PA
Posts: 1286
Joined: Tue Jun 06, 2000 9:44 pm

### RE: What The "tax Break" Really Means...

On the contrary, I think this is an excellent analogy. One only has to look to some of the European countries (say, Sweden or Britain) to see that when you overtax the well-off, they choose to leave the party and put their income out of the reach of the government. This is why so many citizens of countries with high upper tax rates choose to move abroad instead of forking over half their income for the "privilege" of living in a particular country.

N79969
Posts: 6605
Joined: Tue Jan 29, 2002 1:43 am

### RE: What The "tax Break" Really Means...

Paul Krugman is a renowned economist and basher of President Bush. One of my friends sent me a column of his the other day and I blew it off because this guy never has anything good to say about Bush. However, I have come around to the view that the tax cut probably needs to weighted more towards equity on the equity-efficiency continuum.

http://www.nytimes.com/2003/01/14/opinion/14KRUG.html

N766UA
Posts: 7859
Joined: Thu Jul 29, 1999 3:50 am

### RE: What The "tax Break" Really Means...

I don't care what party you belong to, money is money. I don't think anyone in the US can honestly say they don't like tax cuts.
This Website Censors Me

N79969
Posts: 6605
Joined: Tue Jan 29, 2002 1:43 am

### RE: What The "tax Break" Really Means...

There is a risk though. If the cash people gain from the tax cut is used for consumption of imports, then it will do little to stimulate the US economy and possibly could increase the federal debt.

I support tax cuts but sense that it would be better to frontload this one, simplify it, and perhaps even make them bigger for the middle class.

Illini_152
Posts: 959
Joined: Sun Jan 14, 2001 6:00 am

### RE: What The "tax Break" Really Means...

Even if people spend their money on imported widgets, it STILL helps the economy.

The retailer that sold them the imported widget makes money, the govenment gets money from the sales tax and import tariff on the widget, the shipping company gets money to bring more imported widgets to the retailer, the dockworkers or cargo loaders have to unload more widgets off the boat. All these people will make more money, and spend more, pay more in taxes, etc.

But to say that we shouldn't give a tax cut because someone MIGHT spend the money on imoports and that won't help the economy is ludicrous!
Happy contrails - I support B747Skipper and Jetguy

We're Nuts
Posts: 4723
Joined: Sun Jun 04, 2000 6:12 am

### RE: What The "tax Break" Really Means...

Well first of all, Apathoid, the poor DO pay taxes. So a more accurate way to say it would be that the first four people pay, let's say \$0.50 each. And under a typical Bush tax-cut, the richest man, number 10, would get a four dollar tax break while the poor folks got a nice one dollar tax raise, each. So while your post may be a nice utopic way of thinking about things, it holds no weight in reality. But I didn't need to tell you that... so why bother posting it?
Dear moderators: No.

apathoid
Topic Author
Posts: 887
Joined: Fri Sep 28, 2001 3:19 pm

### RE: What The "tax Break" Really Means...

How many poor single mothers pay taxes? Not very many nutsy. Truth be told, if you have any dependants and make less than about \$35,000 a year, you are NOT paying taxes.

I know you like to go off half cocked, but the "less fortunate" in our great land get more than what they pay back come tax return time.

My brother in law, leech that he is, actually gets nearly \$5000 a year even though his federal withholding is less than that every year.

Ever hear of the Earned Income Credit? Works great if you are a lazy little welfare bastard.

MD-90
Posts: 7836
Joined: Mon Jan 17, 2000 12:45 pm

### RE: What The "tax Break" Really Means...

I've seen that example before, and I thought it was very profound.

We're Nuts, care to back up that rash statement that under a typical "Bush tax cut" the poor wind up getting a raise in the taxes?

B747forlife
Posts: 386
Joined: Tue Nov 20, 2001 9:36 am

### RE: What The "tax Break" Really Means...

Hey, what's up all. Anyway, I was wondering how many of you liberals would say these cuts are for the rich? All of you probably!! But, you're wrong. You know who these cuts are for:

those making around \$90,000 per year. Is that a lot of money? Perhaps, but it is certainly not rich, and certainly middle class salary. Two teachers in Montgomery County, Maryland together make about \$90,000 per year. Eveyone knows that teachers are paid shit for what they do. These cuts are not for the rich, they are for the middle class. The liberals wouldn't have you know this, and just say rich, but as I am shown, \$90,000 per year for a family is not rich.

Sorry guys, nice try, maybe next time.

-Nick

707CMF
Posts: 4698
Joined: Thu Mar 14, 2002 5:39 pm

### RE: What The "tax Break" Really Means...

B747 > \$90,000 per annum ?
Right, I wold not call that rich, but I would not say that is shit paid. That would be 45,000 per year/person, and I don't know any teacher that go anywhere near that kind of salary.

My sister is a teacher (college teacher ,with a doctorate), and earns only 25/26,000\$ per year (after taxes) .The figure you show are for an executive, not for a teacher.

Antoine

Andreas
Posts: 5880
Joined: Tue Oct 09, 2001 7:56 pm

### And The Story Goes On...

...now for the sake of argument let's assume that the tax authority in this lovely little fairytale is not an Almighty Deity but instead a human government that has to pay for a lot of things.
Let's further assume that the restaurant is somewhere in the backwoods close to the camping and fishing grounds of Mr. Apathoid, and there is only one road leading to that restaurant.
After the generous tax cuts, this government is no more able to pay for road maintenance and the road soon is unusable. All ten men are no more able to find the restaurant in the backwoods, and the whole story unmasks itself as pure bullsh.t, no matter if you're a liberal or rightwing!

The problem with accounting people is...they tend to look at things from close-up and never take the surroundings into account.
I know it's only VfB but I like it!

Alpha 1
Posts: 12343
Joined: Sat Feb 03, 2001 12:12 am

### RE: What The "tax Break" Really Means...

Hey, what's up all. Anyway, I was wondering how many of you liberals would say these cuts are for the rich? All of you probably!! But, you're wrong.

Every economist that I've seen quoted on this stimulus package-including conservative ones, have said that the biggest benefits, by far, will be for the top 10% in income. They will reap the biggest windfall. So yes, these cuts are targeted for the rich, and for business. Why? Easy. Because Republicans still cling to the "trickle down" theory, that says "give the rich the tax breaks, and what they buy will trickle down into the economy and stimulate it".

There's one flaw with that: what the rich will buy will not go far enough to help employers hire new employees, especially in this economy. It will not help any employees get a pay raise. It will not help the Average Joe one bit because by the time anything "trickles down" the effect, if any, that reaches him, has evaporated. It's a scam. It's a way to make the truly wealthy, who have more money than they'll ever need in the first place, to become more wealthy. It will have no effect on getting the economy going.

those making around \$90,000 per year. Is that a lot of money? Perhaps, but it is certainly not rich, and certainly middle class salary.

A \$90,000 salary, middle class? By who's standards? It certainly is not rich, but it certainly is not middle-class.

Two teachers in Montgomery County, Maryland together make about \$90,000 per year.

Two teachers with a few years under their belt, maybe, but not someone just starting out. Teachers everywhere make horrible wages when they first start. I know. My father taught for 30 years, and it took him forever to reach a \$45,000 range, AFTER TAXES. (if he ever did).

Again, do your homework. These cuts are targeted to benefit the top 10% of earners in the country, and corporations-and the tax cuts for the corporations is going to just kill already-strapped state budges. If you think otherwise, you're crazy.

saintsman
Posts: 2037
Joined: Fri Mar 15, 2002 12:34 am

### RE: What The "tax Break" Really Means...

"The problem with accounting people is...they tend to look at things from close-up and never take the surroundings into account."

That reminds me of a little story. Accountants looking at ways to save money decided that if they only bought single sheet toilet paper instead of double they would save half the cost. So single sheet toilet paper was bought. however when people came to use it they found that their finger would poke through the paper. So to over come that problem they folded the paper over and just to be safe doubled it over again. This resulted in the toilet paper bill being twice as much as it was before the accountants got involved and because people kind of liked the additional safety of folding over the paper they carried on doing it even when the single sheet paper was replaced with the original so still the bill was still doubled.

N79969
Posts: 6605
Joined: Tue Jan 29, 2002 1:43 am

### RE: What The "tax Break" Really Means...

Illini_152,

That's not the point. The tax cut is designed (in theory) to stimulate capital spending by lowering the taxes on investments. Because of multiplier effects, this hopefully will result in job creation, higher incomes, and more consumption in this country.

If consumers do spend their new found wealth on DVD players, European vacations, and Bugatti's, it does not help the US economy much. Although Best Buy, your travel agent, and the car dealer will sit high on the hog for a while, the benefits of additional investment and job creation will occur overseas at US taxpayer expense.

That said, the possibility of that outcome is not enough to argue against a tax cut.

Alpha 1
Posts: 12343
Joined: Sat Feb 03, 2001 12:12 am

### RE: What The "tax Break" Really Means...

The tax cut is designed (in theory) to stimulate capital spending by lowering the taxes on investments. Because of multiplier effects, this hopefully will result in job creation, higher incomes, and more consumption in this country.

You've just described one of the Holy Grails of Republican economics-the Trickle Down Theory. That's what that is, and it's NEVER been shown to result in job creation, or in generationg higher incomes, and creating anything more than token consumption among consumers.

Let's say one of the very wealthy who get a nice break from this plan gets, say \$25,000 in savings on taxes. What are they going to do with that \$25,000. How far can that go in creating jobs? Not far. It's not enough to creat jobs; it's not enough to lead to higher incomes; it's not enough to increase consumption much. All it will do is increase the wealth of the already wealthy.

Some will say "well, multiply it nation-wide, and you have all of that." No, you don't. Not all the wealthy live in the same area-they're spread out nation-wide, and so the effects are now minimal on a nationwide scale. Giving someone who already has more wealth than they know what to do with a little more money that they won't know what to do with. It's hogwash.

If you really want to help the economy, and spur grown, give every middle-income family about \$1000-\$3000 in immediate relief, and then you might see some stimulus in spending.

N79969
Posts: 6605
Joined: Tue Jan 29, 2002 1:43 am

### RE: What The "tax Break" Really Means...

Alpha 1,

I disagree with you. You came back with the trite democratic response against tax cuts in general. There are problems with Bush’s tax cut but they are not what you pointed out. I think more of the tax cut should go to the middle class.

The US has outperformed most of the OECD for the past 20 years and I think much of US success can be attributed to our relatively low tax structure. I think Trickle Down has resulted in significant job creation. I think wages for many people are stagnant but for reasons that are not directly related to tax policy.

People can spend, save, or invest money. The government can use tax policy to encourage or discourage any of these choices. By cutting tax on dividends, you encourage people to invest. You also make consumption and ordinary saving more expensive.

If a wealthy household gets an additional \$25,000 a year, it could do a lot for the economy. Even if a person simply deposited the money in a savings account, our fractional banking system would multiply that amount several times over.

If that household invests in a start-up, that firm could succeed and could generate profits and jobs. To put is simply, investment encourages more economic activity and works like a breeder reactor. The multiplier effect is empirically sound and does not qualify as “voodoo economics.”

I agree with your last sentence. That is a fair criticism of the Bush plan.

donder10
Posts: 6945
Joined: Sun Oct 21, 2001 5:29 am

### RE: What The "tax Break" Really Means...

Even the CIA site states that the trickle down affect has hardly worked.

Andreas
Posts: 5880
Joined: Tue Oct 09, 2001 7:56 pm

### RE: What The "tax Break" Really Means...

Even if Trickle-down works, the effect of tax cuts now on tax income of the government later is much lower than the sheer cost of the tax cut.

So again the question: How do you propose to refinance the package? Deficit spending? Well, then someday the USA will spend most of its money not for new fighter jets or health care or whatever you like, but for interest payments.

Just look at respective empirical studies, read those instead of calling others "tree bangers" or accusing them of "mindless shots".

I know it's only VfB but I like it!

JetService
Posts: 4611
Joined: Mon Feb 21, 2000 1:12 pm

### RE: What The "tax Break" Really Means...

"If you really want to help the economy, and spur grown, give every middle-income family about \$1000-\$3000 in immediate relief, and then you might see some stimulus in spending."

If I got that kind of break, I would pay virtually no federal income tax at all. Even \$500 to every middle-class family would create a huge boost in consumption IMHO.

N79969
Posts: 6605
Joined: Tue Jan 29, 2002 1:43 am

### RE: What The "tax Break" Really Means...

In terms of fostering long-term economic growth, consumption is like a candy bar and investment is like eating a balanced meal. I will speculate a little bit here. I think that wealthier people have a lower marginal propensity to consume than middle class people. That is, they will consume less of their tax refund and invest or save more. A middle-class family will have more immediate needs and will consume more of their new found income than a wealthier family. A wealthier family (since more of their stuff is paid off), may elect to save. I think this is why and how trickle down works as a stimulant of long term economic growth. I concede this is speculation.

However, I think the flaw in the Bush plan is that it ignores the immediate pain that many people are suffering. I think any tax relief should be front-loaded and temporary. The US economy does not have any fundamental economic that require the kind of remedy that Bush is proposing. There is definitely some mismatch between the diagnosis and the cure here. The country could use a candy bar right now.

B747forlife
Posts: 386
Joined: Tue Nov 20, 2001 9:36 am

### RE: What The "tax Break" Really Means...

Alpha 1 - I've done my homework. Remember this is Montgomery County, I think the 3rd or 4th richest county in the US. \$45,000 per person is shit here. \$90,000 per year is middle class, compared with how high the upper class can get. The trickle-down effect is true and real, you just refuse to accept it.

707cmf - Nope, this is salary for teachers, not executives. Read my post.

-Nick

donder10
Posts: 6945
Joined: Sun Oct 21, 2001 5:29 am

### RE: What The "tax Break" Really Means...

The trickle-down effect is true and real, you just refuse to accept it.
Well,often the evidence suggests otherwise.

N79969
Posts: 6605
Joined: Tue Jan 29, 2002 1:43 am

### RE: What The "tax Break" Really Means...

Donder10,

You make it sound as if it were totally discredited. That is not the case. It's a controversial theory but not dead.

What Nick said is correct. In much of the metro-DC area, a \$90K household income will not get you a home. It is insane around here.

delta-flyer
Posts: 2631
Joined: Mon Jul 30, 2001 9:47 am

### RE: What The "tax Break" Really Means...

N79969....In terms of fostering long-term economic growth, consumption is like a candy bar and investment is like eating a balanced meal.

I disagree. Consumption is the very basis of our economy. Without consumption, what would businesses invest in? Who would buy the goods and services for which the new malls and factories are built with these investment dollars? Reducing taxes helps both consumption and investment, but where you direct the tax cut is important for maintainng the right balance between investment and consumption.

In the 1980's, interest and inflation were high, and consumers were spending. That was a good time to stimulate investment by cutting taxes at the higher income levels, since those people will more likely invest their tax savings than spend them.

In today's economy, interest rates are low and businesses are operating below capacity. This calls for stimulating consumption. That is best achieved by cutting taxes at the lower income levels, as that will more likely be spent than invested. As people spend more, businesses will hire more employees to meet the demand. Whendemand gets really hot, then you cut taxes at the higher income levels.

The analogy above may sound cute, and, coming from a professor, may even command some credibility, but it is presented in a total vacuum. The basic factor it ignores is that today's environment follows 20 years of disproportiately greater tax increases at the low income levels compared to high income levels. Therefore, under these circumstances, a break for the lower income levels is not unreasonable.

The second weakness in the analogy is that it erroneously assumes that an incremental change in the taxation of the richest will have catastrophic consequences. In reality, the rich are extremely agile in adapting to new tax laws and quickly figure out strategies to mitigate their added tax burden.

The third weakness in the analogy is that it does not address the income distribution of the 10 people. Maybe the top banana earns 65% of the group's income, in which case his 59% contribution was inadequate to begin with!

Cheers,
Pete

"In God we trust, everyone else bring data"

N79969
Posts: 6605
Joined: Tue Jan 29, 2002 1:43 am

### RE: What The "tax Break" Really Means...

Delta-Flyer,

I disagree with you on several points but agree on others. Consumer spending is 70% of the economy. Consumption goes up with higher wage rates, population increases, and so on. However, the only way wages can go up is through increases in productivity. Productivity increases are achieved only through technology and investments in capital goods. That's why investment creates long term growth in the long run-- by stimulating higher productivity which leads to higher wages. If you boost consumption without boosting productive capacity in the economy, it will simply be Happy Hour on payday for a while and then things will come back to the status quo.

One fallacy in your previous post is that you seem to assume that the slowdown is mainly in consumer spending. I think that businesses are running below capacity because business spending has fallen off as they struggle with debt. The drop in business spending has been enough to slow things down. Consumer spending has been rather resilient though. So far.

I do think we need to boost consumer spending in the short term. There is pain out there and I agree that something needs to be done. However that does not lessen the argument for improving the incentives for investment to foster long-term growth. Our tax code currently favors debt financing as opposed to equity. This is another reason that change is needed but it is another argument altogether.

delta-flyer
Posts: 2631
Joined: Mon Jul 30, 2001 9:47 am

### RE: What The "tax Break" Really Means...

N79969..... I agree with your remarks about the need to increase productivity by investing in technology. But you can't get businesses to invest when they are not making a profit, even though that would seem to be a desirable goal. I don't see businesses investing without first a serious upturn in consumer spending.

Even without a tax break for the upper income segment of society, there will still be enough savings to satisfy business's need for capital. The extremely high price/earnings ratios just prior to the market bust is evidence that plenty of money was available to go into the stock market, as it was driving up stock prices into insane levels.

I'd like to see the present tax break go the the low end of the income spectrum, as the tax burden has been creeping the other way (in relative terms) over the past 25 years.

Looks like we will just have to agree to disagree.

Pete
"In God we trust, everyone else bring data"

N79969
Posts: 6605
Joined: Tue Jan 29, 2002 1:43 am

### RE: What The "tax Break" Really Means...

Delta-Flyer,

I guess we will. Good discussion. Thanks.

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