Professor Kamerschen on Tax Cuts, Envy & Willful Idiocy
Michael Medved linked this "tax cut parable" and discussed it today on his show. It's worth spending some time thinking about.
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 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 end up being 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 overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
Well, the good professor didn't talk about what happened after that, but I will. The nine dudes had been given an IOU for $40.00, so they showed up the next night and beat up the bar-tender and took over the bar. They hired their girlfriends to be barmaids for $50 an hour and threw an enormous nickel draft party.
Early the next day the beer truck driver came around looking for $1,000.00 for a shipment. When Mr. Fourteen-dollar went to the register he discovered that the till had completely disappeared. Coincidentally, two of the non-payers and all four non-payer girlfriends were missing. The trucker and some of his buddies beat up the remaining seven guys and took some refrigerators and a few girlfriends as payment. Then the Hell's Angels showed up and after pillaging the booze, they took the left over girlfriends and completely trashed the joint.
A week later, some graffiti artists came and painted some kind of picture of something or a mural or design or whatever.
Three months later, someone opened a karate studio where the bar had been, of course.
OK, so in that example you are treated like ‘boys and girls’ and offered up a
ReplyDeletesimple analogy that any beer drinker could relate to and it is asserted by
someone that would appear to know what they are talking about.
Its all bogus, including the lesson,
How Taxes Really Work
To start with . . . .
In the US and throughout most of the rest of the world, the tenth man would
have paid off a politician for $10 to get a beer subsidy of $30 per night(to
create jobs for the bartender). Of this $30, $10 of course would have covered
the lobbying expense, $10 would go in his own pocket, $1 would go to the bartender
to keep his mouth shut, and $9 would go to the bar.
The Bar would give him a kickback of $10 each night for bringing in his 9 buddies
to make them into alcoholics, repeat customers for life.
The Bar would then raise their prices to $130 citing inflation and higher taxes.
The tenth richest man would then secure his finances in a Dutch Holding Company
managed by a trust in Ireland which invests in Chase and Bank of America.
He would then explain to his buddies that he is as poor as the rest of them and
can’t afford to pay himself as he cries into his beer that night citing his latest
financial report which shows him to be broke on paper so that he doesn’t have to
pay taxes in the United States ever again.
Citing his former generosity, the other nine men would agree that the tenth man
can now pay nothing like the 4 poorest.
The others would then be faced with an adjusted amount of
* The fifth would pay $3.
* The sixth would pay $10.
* The seventh would pay $22.
* The eighth would pay $38.
* The ninth would pay $57.
Now the group would recognize that this is not fair and so would lobby the
Government for an Earned Drinking Credit for the Poorest men. The government
would oblige and give the four poorest men $2 each, but they would tax the
5th - 9th men $2 each as well.
* 4 men receive a total of $8 and 5 men pay $10.
The adjusted amounts would then look like this for all 10
* First Receives $2 pays $2 | Net 0
* Second Receives $2 pays $2 | Net 0
* Third Receives $2 pays $2 | Net 0
* Fourth Receives $2 pays $2 | Net 0
* Fifth Pay $1 to bar pays $2 to tax | net paid $3
* Sixth Pay $8 to bar; pays $2 to tax | net paid $10
* Seventh Pay $20 to bar; pays $2 to tax | net paid $22
* Eighth Pay $36 to bar pays $2 to tax | net paid $38
* Ninth Pay $55 to bar; pays $2 to tax | net paid $57
* Tenth Man: Tax Credit Received: $30 ;
Pays $10 to politician;
$1 to bartender;
Receives $10 from Bar
Net RECEIVED $29 per night and free beer
Of course this can not go on forever as the sixth, seventh, eighth and ninth
men can’t afford to pay those rates forever. So they start paying with their
credit cards held by Bank of America and Chase.
The tenth man would start demanding a higher Return on Investment from his
investment managers, who would be hearing similar requests from all of their
other investors. They would then expand their holdings into mortgaged back
securities where a good deal more profit could be made.
Meanwhile the Fifth through ninth men are racking up debt on their credit cards
from drinking every night, their health care costs are increasing as their liver
fails, and they are also spending more on gasoline as they drink and drive as
they can no longer afford to cab it.
Ultimately, they end up refinancing their credit cards into their house where
they have equity. The mortgage broker promises them a 4.9% interest rate on the
refinance which sounds good as their credit card interest rate is up to 21%.
The broker promises them that they will not have to verify their income, provide
W2’s nor copies of their tax paper work.
Their mortgage broker doesn’t tell them, but lies about the value of their house
in order to refinance their credit and help them avoid paying private mortgage
insurance. At their current income levels, and without verifying their income,
their mortgage would be classified as Sub Prime and the interest rate would be 10.9%
The mortgage officer lies about their income levels as well to boost the internal
credit scoring mechanism and get them financed, not at 4.9% but 5.9%, which is better
than 10.9% and happens to pay the mortgage broker a higher commission than a loan at
4.9% that is not sub prime.
The mortgage broker also promises them a payment of $900 per month, but fails to
mention the balloon payment of $50,000 in the 5th year and doesn’t mention the
adjustable rates in year 3.
The men separately show up with a hangover and sun glasses on the date of their
close for their new mortgages. They trust their broker and do not read the paperwork
in detail flipping and signing almost as fast as they could raise a beer bottle to
their lips.
The loan closes, the mortgage broker gets a fat commission, the bank securitizes the
mortgages by selling them to an Irish Hedge Fund and pockets collectively a billion
dollars in profits that year.
The hedge fund holds the investment for a year, shows a 35% gain on paper and starts
selling shares to retirement funds and 401ks in the US that the Sixth through 9th
men just happen to have the rest of their life savings sitting in.
The tenth man sees the writing on the wall, literally magic marker on a stall in the
restroom of the bar.
“The end is Nigh”
He pulls his money out of the Irish Hedge fund invested in real estate and invests
in Gold at $600 a troy ounce.
Meanwhile, he lobbies congress to tighten bankruptcy laws for credit cards which he
still has a sizable investment in. Congress tightens bankruptcy laws and makes it
impossible to absolve credit card debt, forcing people into chapter 13 where they
must pay off the debt within 3 years or go to debtors prison where they can work
it off in 7 years.
Gas prices are still going up so the President ignores a minor terrorist threat,
allows the terrorists to blow up a major building and then goes to war with the
terrorists home country where there is no oil, and simultaneously with a country
that sits on 10% of the worlds oil reserves that has a decimated military
infrastructure.
Oil prices shoot through the roof with Gold following close behind. The President
whose family comes from oil barons make a fortune and become famous at their skull
and bones country club outside of Yale.
Meanwhile our famous 10 guys, start paying even more money at the pump. The first
4 guys end up taking second jobs working at Wal-Mart and have to give up drinking
at the bar so that they can try and beat their teenage kids out of a promotion.
The fifth and sixth guys get foreclosed upon. They were forced to stop paying their
mortgage payments so that they could pay their mandatory credit card payments as
required by the new bankruptcy law.
The seventh, eighth and ninth men all previously traded up their homes for
McMansions that they can not afford with interest only payments of $2300 a month.
When foreclosures start happening their plans on flipping their McMansions and
cashing in on the equity slips through their fingers.
To make matters worse seven and eight get laid off from the companies they work
for when their jobs get outsourced to China. The ninth man keeps his job at a
law firm, but fails to notice that his 401k fund is slipping and has lost 10% in
the last year. Things are looking up as his law firm seems on the edge of landing
a big contract with Merrill Lynch.
Then the real estate crash and sub prime mortgage scandal erupt. Banks start
dropping like flies to be saved not by the cash strapped government that can barely
afford the war for oil any longer, but by China. Oil and Gold soar, Gold hits $900
a troy ounce and Oil hits $130 a barrel (about the same amount for 10 rounds of
beer prior to the crash). Beer prices hold steady for the first few months, but
then start to edge up as gas prices for delivery creep into the bar owners expenses.
Then the first four men one night remember their favorite bar. They sneak around
back around 4:30 am and steal 50 empty kegs that just happen to be made of pure
aluminum. Those kegs are now worth about half the value of a keg that is full in
scrap metal prices or about $80.
They are not stupid and don’t want to get caught turning the kegs in at the dump
where the police are already looking for keg thieves. So they head out to the
closed down manufacturing plant where they used to work. They start a big fire,
and melt down the aluminum into big messy aluminum splashes on the cement.
They turn in the aluminum for cash and get caught up on their back alimony and
child support before heading back to work at Wal-mart where they now work for
their teen age kids that beat them out for that promotion earlier in the month
because their job skills weren’t as good as recent high school graduates.
They then begin dreaming of new ways to find aluminum alimony allowances.
Meanwhile, the banks and mortgage companies lobby congress spending about
$10,000 a head in an election year to bail out the economy. Congress provides
the major banks with government backed loans to refinance the bad sub prime
loans so that the government can personally guarantee those bad loans. They
also put $100 billion of actual cash into the hands of Americans hoping to
stimulate the economy.
Americans however, are all in debt up to their eye balls and use the extra
$1200 they receive to make 2-3 credit card payments. They take the $300 for
each kid and buy groceries for the month and then they start worrying about
next month.
The banks get away free as they have Chinese financing now and no bad loans
as they have refinanced them over to the US Government. The US government had
to print more money to pay for all of these actions and so Gold goes up to
$1500 a troy ounce.
The tenth man is now worth Billions and moves to Costa Rica to retire taking
the new trophy wife that used to be the bartenders girl friend with him.
The first four men end up going to county prison for 3 months for stealing
aluminum dog crap receptacles after running out of kegs to steal.
The fifth and sixth men end up living in an apartment and then homeless
after they lose their jobs at Wal-Mart.
The seventh and eighth men whom we previously left hanging in our story after
they lost their jobs and ability to pay for their homes, end up losing their
homes, and their kids. They and their spouses are each convicted of mortgage
fraud by the FBI in a major sting operation after it is revealed that they
lied on their mortgage applications. Their mortgage brokers who actually did
the paper work cop a plea agreement in exchange for immunity with the Feds
and rat out each of their unsuspecting customers.
The ninth man ends up losing his entire retirement fund which took a big hit
as the dollar rapidly plummeted into free fall. He ends up refinancing his
own house under a government backed loan for $650,000. Unfortunately, a tornado
comes through that winter in a freak coincidence and levels the home. FEMA
promises to provide assistance but never shows up and the ninth man freezes to
death attempting to salvage the shreds of his belongings. His home insurance
policy refuses to pay as they claim that his house was over valued and then they
prove it with comparables studies from his own mortgage brokers database.
The tenth man ends up dumping his new bride a year later, moving back to the
states a year after that when the US appears to have hit rock bottom and he
leads up a Chinese real estate investment initiative in the states. He makes
another $10 billion in ten years, but is then executed in Beijing for espionage.
Meanwhile, the bar tender goes on to win American Idol and sleep with Paula Abdul.
They are now blissfully happy, doped up on anti-psychotics, and the biggest two
idiots the world has ever seen.
EDIT - Note this article is not written to refute the article titled ‘How Tax
Cuts Work’ by David R Kamerschen. That is because David R Kamerschen refutes
having ever written the original! This is just an article to expand on the concept
of the original article written by an unknown viral writer.