A Rant about Taxation

Someone on a list serve sent me the following email, asking how to respond to a Republican friend who preaches lower taxes for the wealthy. The forward got my blood boiling, so I weighed in, and I thought I’d share the original forward and my response here.

Here’s the original forward:

Because it's the election season, let's put tax cuts in terms everyone can understand. [Way to start out with condescension from the get-go, eh?]

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 man would pay $1.
The sixth man 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 curved ball (or is that a curved beer!).
'Because 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 ??[sic] 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 b y 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 man now paid $2 instead of $3 (33% savings).
The seventh man 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 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 man 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 sho w 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
[and, because the intro wasn’t insulting enough, it ends with this flourish]

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.”

This first thing I did when I read this was to google the Ph.D. who is credited with this deceptive story. It seems there is a David R Kamerschen, Ph.D. who teaches econ at the U. of G., but, of course, he may not have written this. For his sake, and for the sake of the institution where he teaches, I sincerely hope not.

The story shows a fundamental misunderstanding of what taxes are and what they pay for.
It's true that the poor pay less, but they receive less. Taxes don't go to beer. They go to things like police and firefighters and public schools. A policeman defends all homes from, for example, theft, so the wealthy person is receiving protection for far more valuable goods than the poor person. Likewise the firefighter, who is protecting a lot more property when he/she puts out the fire in the wealthy person's home than when putting out a fire in a poor person's home. The same even goes for public schools: the education may be the same for the child of a wealthy person or a poor person (or, at least, it would be if we had a more equitable system) but the wealthy person not only receives an education for his/her child, but a more educated workforce at his or her company, a benefit which the poor person doesn't experience. Also, the values of the expensive property of the wealthy person are related to the quality of the schools, just like the crime rate. Any of you who have crummy schools and have seen a decline in the value of homes in the area know this to be true. So, an economic professor might think we get beer for our tax money, but I'm not sure what country has such a system. I expect services, and the wealthy do benefit more, so they should pay more.

People like Bill Gates Sr. have said as much when they advocate for keeping the estate tax: they know how they've benefited, and that a more equitable system, even one that costs them more in taxes, benefits them even more in services. Bill Gates Sr. wrote: "The estate tax — our nation’s only levy on accumulated wealth — is the fairest and most important tax we have.

"It puts a brake on the concentration of wealth and power, generates substantial revenue from those most able to pay and encourages billions of dollars in charitable giving each year. The estate tax is not only fair but an essential component of our nation’s economic dynamism.

"Without our society’s substantial investments in taxpayer-funded research, technology, education and infrastructure, the wealth of the Forbes 400 richest Americans would not be so robust."

And as to the spurious argument that the ultra-wealthy will leave the U.S. for a country where high taxes and a strong government do not protect their wealth: show me the wealthy person who has decided to invest all his money in countries with low taxes and no stable banking system or protections of personal property, and I'll show you someone who may become very poor very quickly then they government falls or decides to seize his assets without cause. There's a reason a country like the U.S., which taxes the wealthy more than the poor, has the largest GDP in the world, and there's a reason why the economy slips when McCain, Bush, and the other acolytes of anti-tax activists gain power and try to do away with the very regulations that protect us all, wealthy and poor alike.

[I wrote that last bit on September 16th. This is not to say that I have some unusual powers of prognostication when it comes to the markets, but I think any economics professor worth his/her salt would concede that deregulation has shown its darker side quite vividly in the five days since.]

The next day I thought of another example as I fumed about the guy's perverted parable: Imagine that you have a hundred dollars in a bank, and somebody comes along with a hundred million and wants to open an account. The bank decides it will have to build a new, two million dollar high-tech vault to keep all that money safe. A conservative tax scheme would dictate that the most fair way to divide that cost would be for both you and the multi-millionaire to pay an even million each for that protection.

I think, when reduced to that oversimplification, it's easy for anybody to see that fair isn't always equal and equal isn't always fair.