Wednesday, July 13, 2005

Tax Cuts for the Rich, the Deficit, and Serendipity

According to this article in today's Detroit Free Press,
White House budget officials cut their estimate for this year's deficit to $333 billion Wednesday as rising tax receipts from growth in jobs, income and corporate revenue put President George W. Bush in sight of the first decline in the annual shortfall since he took office.

The midyear estimate is less than the Office of Management and Budget's February forecast of a $427-billion deficit for fiscal 2005, which ends Sept. 30, and will help Bush make the case that he is fulfilling his promise to cut the deficit in half by 2009.

The forecast includes all money appropriated by Congress this year for military operations in Iraq and Afghanistan -- approximately $100 billion -- and $50 billion for the fiscal 2006 budget resolution.

The report is "a sign that our economy is strong, and it's a sign our tax-relief plan, our pro-growth policies are working," Bush said.
And according to the The New York Times,
The White House predicted in February that the deficit would hit $427 billion this year, up from $412 billion in 2004. But tax revenues are running about 15 percent higher, and corporate tax revenues are expected to be 40 percent higher.

For economists, an important measure of fiscal health is the deficit as a share of the gross domestic product. The deficit reached 3.5 percent of G.D.P. last year, not a record, but high enough in a period of expansion to alarm many economists. This year, the administration predicts, the deficit will drop to 2.7 percent of gross domestic product. If the latest White House forecast proves accurate, the deficit would shrink to 1.1 percent of G.D.P. in 2009.
Isn't this what happened after the Reagan tax cuts? More discretionary income, spent on things so that businesses were able to expand, leading to more tax revenue? Of course, Democrats disagree, accusing Bush of overstating the orignal deficit estimates, complaining about the cost of the war in Iraq, the looming problems with social security, etc.

Even a lower projected deficit is pretty huge at $350 billion. Maybe we could save some money if we cut some unneeded government programs.

Since the democrats accuse the Bush administration of only producing tax cuts for the "rich", I decided to run the following chestnut that's been floating around the Internet for the past few years.
Today's Economic Lesson in Taxation
Let's put tax cuts in terms everyone can understand.
Suppose that everyday, ten men go out for dinner. 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 $7.
* The eighth $12.
* The ninth $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."
So, now dinner for the ten only cost $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, the paying customers? How could 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 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.
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 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 $2? 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 get the most
benefit from a tax reduction. Tax them too much, attack them for being
wealthy, and they just may not show up at the table anymore. There are
lots of good restaurants in Europe and the Caribbean.

Courtesy of : ?

I removed the name of the alleged author of this piece because when I went to his website, there was a prominent disavowel of his authorship. According to Urban Legends Reference Pages
only question we're covering about this humorous parable explaining "how taxes really work" is its authorship, and the investigation reveals this item to be one of those favored pieces of writing adopted and reprinted by numerous columnists without their knowing (or necessarily caring) who originally penned it.
But is the analogy accurate? It certainly makes sense, even to William Buckley. Finding new things makes research exciting, even if I don't get the information I was looking for, like the author of the Tax piece, and whether or not the deficit projections are accurate.

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