TAX CUTS explained clearly, think so?

Question

CLEAR EXPLANATION OF TAX CUTS

Sometimes politicians, journalists and others exclaim; "It's just a tax
cut for the rich!" and it is just accepted to be fact, without questioning it.
But what does that really mean?

Just in case you are not completely clear and/or do not understand this
issue, the following should help, if you are a reasonable person.

Let's put tax cuts in terms everyone can understand.

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 of you 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 BR end up bei ng 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 somewhere else where the atmosphere is friendlier.

David R. Kamerschen, PhD
Professor of Economics
University of Georgia
CLEAR EXPLANATION OF TAX CUTS

Answer 1

Omen Brother!!!
I'll tell you more, I didn't even see the tax cut, AMT pretty much took care of it. As a matter a fact, taxes are not the only things that should count. Here is a real life example:
When my daughter and I were visiting Yale University, we were told, that if one is accepted there and family makes under 60K a year, they don't expect any family participation. Since I am fortunate to make about 180K per year, I am expected to pay the full amount. So, after taxes and 50K tuition, I net about the same as the the the family making 60K.
Is that not another form of tax? There is probably more than that.
By the way speaking, of the first 5 guys who never paid for beer, just think about Earned Income credit for a second, and you will find out that there are a few guys, who actually get paid to drink beer. As a matter a fact, the tenth guy is not even allowed to drink beer, but still has to send money to the bar -- that is about my tuition example.

Answer 2

The example that you gave only makes sense in a system that has an almost flat tax based on income. The bottom four had exemption that where greater than their income.

The federal tax system is tiered so how gets the benefits depends on where the tax cuts happen. Here are two examples:

A tax cut the affects everyone rich and poor equally that have a tax liability was the addition of the 10% tax bracket, where the first $5,000 of taxable income is taxed at 10% instead of 15%. This saved everyone at the most $300.

A tax cut that affects only the rich (or well to do) was to reduce the tax rates at the levels above the 15% tax bracket. If you are a single person that has a taxable income of less than $30,650 ($61,300 if married) would receive no benefits from that tax cut.

It can also be argued the tax system favors large families, because of the extra exemptions from income and a $1,000 per child, child tax credit.

Or it can be said that the system prefers home owners, such has mortgage interest and property tax deductions, as well as the ability to sell a home at a $250,000 profit without paying a single penny in taxes.

The federal tax system is so complicated that everything that happens to it will be a positive to some, a negative to others, and neutral to some more. It just matters what your personal circumstances are and your personal belief about who should pay how much of the bill. This will tilt anyone’s belief about wither a tax code change is a good or a bad one.

The bottom line is one man's deduction is another man's tax loop hole that they can not exploit.

Answer 3

that was an awesome explanation!

isn't it obvious though that the rich will get a higher DOLLAR reduction even though the percentage is less? it's like saying, would you rather take $30 off a $100 or $80 of $1000? of course the dollar amount of $80 is a higher number but it's a better deal for the person who is getting $30 off the $100. why are people even complaining that the system exploits the poor?

anyways,good post.

Answer 4

That's an oldie but a goodie. I've seen dozens of names at the bottom. The first time was way back in 1969 when the AMT first hit.

Answer 5

It looks like a good example to me.