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Understanding Tax Reductions --- Simplified for Dummies

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  • Understanding Tax Reductions --- Simplified for Dummies

    Sometimes politicians, journalists and others exclaim; "It's just a tax cut for the rich!" and it is just accepted to be fact. But what does that really mean? Just in case you are not completely clear on this issue, I hope the following will help. Please read it carefully.

    Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner 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 ate dinner in the restaurant 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 meal by $20." Dinner 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 eat 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 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.

    Like this:
    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 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 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. 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 and beat him up.

    The next night the tenth man 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 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, appear to get the most benefit from a tax reduction. However, the tenth man received the least reduction in percentage. He is still paying the bulk of the taxes and more people are not paying any taxes.

    Tax the so-called rich too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start eating overseas where the atmosphere is somewhat friendlier
    Rule #1 - If it doesn't change supper it's not worth the worry.
    Rule #10 - YOU ARE NOW THE MINORITY. This country is no longer the one your parents knew. You will not be able to understand it. You will not be able to change it. You must learn to live with it.

  • #2
    Very good illustration Sgt. Geezer....a good explanation of the blatant ignorance and/or dishonesty of the Democratic politicians and their bedfellows in the mainstream press...Here is another facet of the myth propagated by the left....Way back when I was a fresh college grad and worked at a CPA firm is when I first learned this lesson. My second year working there was the first year that Ronald Reagan's newly enacted tax cuts went into effect. I still vividly remember the press and the Democrats characterizing it as tax cuts for the rich. Funny how different reality can be from what the media reports when you actually work with the subject matter on a daily basis. What I noticed is that the "rich" people's tax returns I prepared under the new tax rules required them to pay more taxes than they had the year before. While it was true that their marginal tax rates were reduced under the new rules, they also lost a lot of preferential tax benefits "tax breaks" that were previously available to them. Somehow the press and the Democrats overlooked this factor. I saw files in which some clients who had not paid any taxes in years due to the utilization of good tax planning were required to pay taxes under the new rules. In effect, for these "rich" taxpayers, they actually experienced a de facto tax increase. I never saw mention of this in the news. In contrast, poor little 'ole me the junior accountant making $ 1500 mo. (which even back then was not much of an income) saw my taxes go down compared to the previous year. This was an epiphany for me as I discovered reality was 180 degrees different from what the Democrats and the press were chanting on a constant basis. It enlightened me to the downright ignorance and/or dishonesty of the Democrats.

    I was born and raised in a Democrat family. I hate to admit it now but I had voted for the peanut farmer for president. I'm glad to say that he was the last Democrat I voted for the office of president of the USA.

    I saw this again recently when the Republicans tried to eliminate the death tax. It almost made me puke to hear filthy rich Democratic politicians say that if we eliminate the inheritance tax it will only be a tax cut for the rich.
    Those statements again are based either in ignorance of the facts or dishonesty. We had a woman at that CPA firm who worked exclusively in the area of estates and trusts. The rich don't pay estate taxes. They hire accountants and attorneys who form trusts and utilize other strategies for them so their heirs won't have to pay those taxes. The people who have historically gotten reamed by inheritance taxes is the same group that gets reamed by the income taxes, namely the middle class. The middle class has always been the primary target of the Democrats even though they claim the opposite. The reason is there simply aren't enough rich people in society to bleed. There is a lot of blood to be tapped in the middle class.

    My guess is that the Democrats are just ignorant of basic Economics. I have noticed that not a lot of business majors enter politics but a lot of political science majors and attorneys are in politics. I once had an in depth discussion with an attorney on public policy and the economy and it soon became apparent to me that he had never taken an economics course in his life. I don't know if he was a representative sample of lawyer politicians, but if he was that would explain a lot. What they don't understand (or refuse to accept) is that tax cuts increase tax revenues and tax increases decrease tax revenues. I know this is counter intuitive especially to Democrats who love taxing the folks as much as junkies love heroin. It is logical and fairly simple though. When the government reduces the tax rates, people have more money to spend. The more money people spend, the more goods and services are produced and more jobs are created. The economy grows and so does tax revenues. Conversely, increased taxes means people have less money to spend so business gets less revenue which leads to downsizing (layoffs) and shrinkage of the economy resulting in less tax revenues. Simply put, 1/8 of a large pizza is more pizza than 1/4 of a small pizza.
    Last edited by JPR; 05-04-2007, 02:24 PM.
    Jubilant Patriotic Republican

    America gave Obama the benefit of the doubt when they elected him. Obama is now giving America the doubt of the benefit of his governance......Change you can bereave in!..JPR

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    • #3
      I hope people dont read this and believe it to be fact on either of the accounts. Over simplification can prove a lot of points but that doesn't make it right.

      just a small example why this economic genious is incorrect.

      "It is logical and fairly simple though. When the government reduces the tax rates, people have more money to spend. The more money people spend, the more goods and services are produced and more jobs are created. The economy grows and so does tax revenues. Conversely, increased taxes means people have less money to spend so business gets less revenue which leads to downsizing (layoffs) and shrinkage of the economy resulting in less tax revenues. Simply put, 1/8 of a large pizza is more pizza than 1/4 of a small pizza."

      There is a problem with this theory. A) The rich people have enough money where they aren't really going to spend more of it due to having tax breaks. I bet few to 0 of the millionares stop buying things due to their taxes. B) the greater majority of the people that get tax money back end up using it to pay off debt. That doesn't really help the economy as much as you would like to think in your example.

      There is a happy medium in taxes just like there is in cost of a good. You try to maximize this.

      Bush and his cronies have tried to say we are doing great because home ownership was on the rise a few years ago .. now forclosures are going through the roof and the housing market is taking a plunge... WHY IS THAT?

      Bush's tax cuts are one issue with him. And you can attack the media and the democrats all you want. But if you are going to try to accuse them of misleading well you better be equally ****ed off at bush for misleading people as well

      IM not argueing anything about the tax breaks. I am just trying to say that if you think you can blame the dems and media for all they do you should hold bush equally accountable.
      Last edited by bldg0031; 05-04-2007, 03:10 PM.

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      • #4
        We need Fair Tax now.
        Politically Correct? No.

        Truthful? Yes!

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