Of Taxes & the Cost of Dinner

[jegs2]

From this story:

My thanks to Scott A. Hodge, executive director of the Tax Foundation, for passing along this little story.
Suppose that every day, 10 men went out for dinner. The bill for all 10 came to $100. They decided to pay their bill the way we pay our taxes, so they divided the bill like this:

The first four men - the poorest - would pay nothing. The fifth would pay $1, the sixth $3, the seventh $7, the eighth $12, the ninth $18, and the 10th man - the wealthiest - would pay $59.

One day the restaurant owner threw them a curve (in tax language, a tax cut).

``Since you are all such good customers,'' he said, ``I'm going to reduce the cost of your daily meal by $20.''


Continuing To Eat For Free

The group still wanted to pay the 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 would 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 at the restaurant owner's suggestion, they arrived at this new distribution: The fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the 10th man with a bill of $52 instead of his earlier $59. Each of the six was better off, 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, then, pointing to the 10th. ``But he got $7!'' ``Yeah, that's right,'' exclaimed the fifth man. ``I only saved a dollar too. It's unfair that 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 10th 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 $52 short of paying the bill.

The lesson here is one that congressional opponents of President Bush's efforts to reduce income taxes well understand. But for political reasons they have chosen to engage in class warfare, deliberately misleading their constituents with speeches decrying administration tax policies that ``favor the rich.''


A Generally Unspoken Aspect

But if we are to cut taxes and thereby stimulate the economy (as Kennedy and Reagan so successfully did), we must cut the taxes of the people who pay taxes in the first place. And this year 35.8 million tax filers (representing 69.6 million people) will pay no federal income taxes at all. That's 26.7 percent of the 133 million tax returns the government expects will be filed in 2003.

Ironically had Congress adopted the president's original tax-reduction plan, millions of additional Americans would have been freed of any and all income tax liability.

Surely lower federal taxes are welcomed by the majority of people who pay taxes, but most of the solons on Capitol Hill opposing the Bush plan are catering to folks who, perhaps because of adversity, don't pay their way. They rate kindly concern, even as those who pay the freight deserve a break.

[Joe]

Of course. The effect of even the most piddling Bush tax cut is still going to be beneficial.

[Nathan F]

Interesting analogy there, and quite accurate.

[weemadando]

I always liked the Finnish (I think) system of everything being directly related to how much you earn. So a parking fine will be just as much of a burden for a billionaire as it would be for a poor student.

[AdmiralKanos]

The best system is the abolition of all income tax in favour of a much higher sales tax. There are all kinds of methods of evading income tax, but with a high sales tax, people who live high on the hog will have no choice but to pay a consumption-based tax in proportionate amounts.

The problem is that the government would never replace income tax with a hefty federal sales tax, for many reasons. At best, they would simply add the federal sales tax and keep income tax.

[Illuminatus Primus]

At best, they would simply add the federal sales tax and keep income tax.

At best?!

[Nathan F]

The best system is the abolition of all income tax in favour of a much higher sales tax. There are all kinds of methods of evading income tax, but with a high sales tax, people who live high on the hog will have no choice but to pay a consumption-based tax in proportionate amounts.

The problem is that the government would never replace income tax with a hefty federal sales tax, for many reasons. At best, they would simply add the federal sales tax and keep income tax.

Then it returns to the old debate of the poor having to pay a greater percentage of their income for the same thing.

[Darth Wong]

The best system is the abolition of all income tax in favour of a much higher sales tax. There are all kinds of methods of evading income tax, but with a high sales tax, people who live high on the hog will have no choice but to pay a consumption-based tax in proportionate amounts.

The problem is that the government would never replace income tax with a hefty federal sales tax, for many reasons. At best, they would simply add the federal sales tax and keep income tax.

Then it returns to the old debate of the poor having to pay a greater percentage of their income for the same thing.

What old debate is that? It would be a completely fair system. The guy paying rent has not bought anything, so pays no tax for his place of residence. The guy who buys the $16 million mansion, on the other hand, pays a shitload of tax in the process.

[Nathan F]

The best system is the abolition of all income tax in favour of a much higher sales tax. There are all kinds of methods of evading income tax, but with a high sales tax, people who live high on the hog will have no choice but to pay a consumption-based tax in proportionate amounts.

The problem is that the government would never replace income tax with a hefty federal sales tax, for many reasons. At best, they would simply add the federal sales tax and keep income tax.

Then it returns to the old debate of the poor having to pay a greater percentage of their income for the same thing.

What old debate is that? It would be a completely fair system. The guy paying rent has not bought anything, so pays no tax for his place of residence. The guy who buys the $16 million mansion, on the other hand, pays a shitload of tax in the process.

Then the guy who has 16 million goes down and buys 50 bucks worth of groceries, digging out pocket change, and the person who works for their 15,000 a year to feed their family goes down and pays the same 50 bucks, but payes a greater percentage of his income.

Not that I am necessarily for or against, just being devil's advocate.

[Joe]

There's also the benefit of self-taxation that would come from such a system, since you essentially get to choose how much you pay.

[Edi]

I always liked the Finnish (I think) system of everything being directly related to how much you earn. So a parking fine will be just as much of a burden for a billionaire as it would be for a poor student.

Yeah, that's our invention, the progressive fines.
Basically when a crime is punishbale by fines, they are assigned in units, with each unit being a percentage amount of how much you earn (I don't remember the exact mechanics) and the minimum amount for a unit being €5 or thereabouts. Then, if you get a fine of e.g. 60 units, that's anytjing from €300 to wherever, depending on how much you earn. Lying about income isn't an option either, because the police can check that against tax records in real time (e.g. in case of traffic violations). It's resulted in some rather spectacular fines, I think some rich guy got a speeding ticket of €100,000+ a few years back for doing around 160 km/h inside a 100 km/h limit.

That way you don't get off with chump change if you happen to be rich. There has been talk of changing the system by setting caps on fines because the overlarge fines supposedly violate people's right to punishment proportional to their crime, but I don't see a problem. Not having those caps there actually makes it proportional.

On a high sales tax and no income tax, bad idea. It benefits only the rich. Besides, what do you consider a high sales tax? We've got a general sales tax of 22%, 8% for food and books, 12% for some stuff and 22% for everything else. It's not a magic problem solver.

Edi

[Crayz9000]

Then it returns to the old debate of the poor having to pay a greater percentage of their income for the same thing.

Which is where limited welfare kicks in.

[Arthur_Tuxedo]

Income taxes are a result of neo-classical economics' narrow-minded focus on flows rather than stocks. Sales tax (as long as food and groceries were exempted) is an improvement over income tax, but a wealth tax would be the most fair and useful. If someone can't earn enough to replace, say, 2% of his wealth per year, yet is too wealthy to get welfare, then he's worthless and doesn't contribute enough to society to enjoy such money and station, and his money will be (slowly, it's only 2% per year after all) redistributed to the more needy.

The disadvantage of this over an income or sales tax is that those have the effect of an automatic stabilizer for the economy, reigning it in during booms when people make or spend more and are taxed more greatly on it, and expanding it during recessions. However, the problems with income and sales tax are far worse and more inequitable.

Books have been written about the problems with income tax could be expounded upon, and they're pretty well understood, but the problem with sales tax is less obvious and well known. The problem is that the tax burden for luxury goods that the wealthy are likely to buy falls not on the wealthy themselves, who's demand simply shifts away from those goods, but on the middle and lower class workers who produce the goods when they are laid off. Then of course there's the problem we're all familiar with: that while the rich spend (and are taxed on) less than 25% of their monthly incomes, the poor spend all of it (and more).

A wealth tax avoids these problems, and the one it introduces (lack of automatic stabilizer) is not that troubling. There are plenty of stabilizers, automatic and otherwise, and the loss of one is not a big deal compared to the gains in equity. Of course, this idea would never float because it would actually work, and the wealthy hold most of the political power.

[Joe]

No, such a tax will simply result in people moving their in assets into foreign tax havens. And a two percent wealth tax would never in a million years pay for the kind of spending that our government does.

[Arthur_Tuxedo]

No, such a tax will simply result in people moving their in assets into foreign tax havens. And a two percent wealth tax would never in a million years pay for the kind of spending that our government does.

There's a limit on how much of a person's wealth can be in numbered accounts. Except for the filthy rich, most wealth is represented in a person's house and automobiles, or other physical things. Even so, a two percent tax on wealth would not be enough of an incentive to transfer money out of stock, bond, and real-estate markets and into anonymous savings accounts, as the difference between rates of return is almost always more than two percent, and they would end up losing money.

As for whether two percent would be sufficient, first of all that's an arbitrary number, it could be that we need three and it could be that only one is needed. Second of all, not knowing the gross domestic wealth of the US, you have no basis to claim that it would or would not be enough.

[Wicked Pilot]

Then the guy who has 16 million goes down and buys 50 bucks worth of groceries, digging out pocket change, and the person who works for their 15,000 a year to feed their family goes down and pays the same 50 bucks, but payes a greater percentage of his income.

What's the point? Even without the taxes the 15k guy is paying more of his income for food (assuming both persons have the same eating habits). Should the super market charge the poor guy less for the same milk and eggs?

Don't also forget that guy making 15k isn't paying a shit load of taxes on his new Raytheon Premier I jet.

[Joe]

There's a limit on how much of a person's wealth can be in numbered accounts. Except for the filthy rich, most wealth is represented in a person's house and automobiles, or other physical things. Even so, a two percent tax on wealth would not be enough of an incentive to transfer money out of stock, bond, and real-estate markets and into anonymous savings accounts, as the difference between rates of return is almost always more than two percent, and they would end up losing money.

Irrelevant, since 2 percent is not going to be enough. There simply isn't enough money in America for such a small tax to generate the kind of revenue the federal government needs. Hell, the estate tax confiscates over half of the assets of wealthy individuals who die and brings in a relatively small amount of federal revenue. The median wealth per household in America is only around $40,000. A 2 percent tax of that absolutely would never bring in 2 trillion dollars of revenue. In any case, since you're the one arguing that such a tax is a better alternative than an income tax, it's up to you to produce the numbers necessary to generate the required federal revenue.

[Arthur_Tuxedo]

Irrelevant, since 2 percent is not going to be enough. There simply isn't enough money in America for such a small tax to generate the kind of revenue the federal government needs. Hell, the estate tax confiscates over half of the assets of wealthy individuals who die and brings in a relatively small amount of federal revenue. The median wealth per household in America is only around $40,000. A 2 percent tax of that absolutely would never bring in 2 trillion dollars of revenue.

I'd be very interested to know where you got that $40,000 figure. By my calculations, if that were true, and there's 100 million households in the US, then the total value of all wealth held in the U.S. would amount to $4 trillion. Very curious in light of the ~$10 trillion annual GDP. Americans may be big spenders, but to spend 2 and a half times the toal value of everything they own every year strikes me as a little, I don't know... impossible.

I don't think you've really thought this rebuttal through, because it doesn't make any damned sense. Let's give you the benefit of the doubt though as far as your figure goes: If the $40,000 figure came from a credible source, there is still something missing. Namely, it's a median. We're interested in the mean, which could easily be in the tens of times higher. Remember that the US has an extremely uneven wealth distribution by first world standards, and the top 5% richest families own most of the countries' wealth.

In any case, since you're the one arguing that such a tax is a better alternative than an income tax, it's up to you to produce the numbers necessary to generate the required federal revenue.

I didn't ask you to generate numbers, I said the precise number was arbitrary and ultimately unimportant. Whatever number suits the goal will work.

And you evaded the point that most of even the richest families' assets are non-liquid. Besides, if that kind of thing went on large scale for even part of a year, the government would by necessity put a stop to it through more thorough investigation, stiffer penalties, and (most importantly) enforcement of existing laws against those who are currently more or less above it.