Tuesday, October 21, 2008

Just Spreading the Wealth

Obama says he wants to "spread the wealth around", for fairness reasons, whether or not it results in greater revenue for the government (lower taxes tend to promote growth and hence actually increase tax revenue).

An interesting experiment, found on a comment page attributed to a reader of the Eagle Tribune:
Today on my way to lunch I passed a homeless guy with a sign the read "Vote Obama, I need the money." I laughed.

Once in the restaurant my server had on a "Obama 08" tie, again I laughed--just imagine the coincidence.

When the bill came I decided not to tip the server and explained to him that I was exploring the Obama redistribution of wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need--the homeless guy outside. The server angrily stormed from my sight.

I went outside, gave the homeless guy $10 and told him to thank the server inside as I decided he could use the money more. The homeless guy was grateful.

At the end of my rather unscientific redistribution experiment I realized the homeless guy was grateful for the money he did not earn, but the waiter was pretty angry that I gave away the money he did earn even though the actual recipient deserved money more.

I guess redistribution of wealth is an easier thing to swallow in concept than in practical application.
Interestingly, Obama claims he'll give a tax break to "95% of Americans" when only about 60% pay income taxes.

That means the 40% who already pay no income taxes are going to be just handed cash.

Your cash.

That's welfare, not a tax cut!

Indeed, that 5% that would not get a tax cut is already paying HALF of all taxes collected!

Imagine suddenly everyone were given twice as much money as they had before, but no actual productive increase in goods or services had taken place -- that's what handing money to people is like.

Because the cash did not come from generating wealth in the form of new goods or services, prices of everything will quickly double to absorb the extra money (because things are just as scarce as they were before), and nobody gets ahead!

Indeed, the disincentive to work will cause a contraction of living standards for all.

That's Obama's socialism.

They argue people pay other taxes, however; as the Wall Street Journal points out, giving someone a Social Security tax refund out of Income Tax revenue is a shell game.

Another complaint is "tax cuts benefit the rich" -- well if they benefit you too, why not? The rich are paying much more to start with anyway. This explanation of unknown origin is actually close to correct numerically:
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 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 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.


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