At the forefront of political news today is the congressional debate over raising our $14.3 trillion debt ceiling…the amount of money we owe other creditors such as China and our Social Security System. Republicans want spending cuts with no tax increases while the Democrats, lead by President Obama, insist tax increases on ‘millionaires and billionaires’ must be part of the solution. What President Obama is referring to is his proposal to raise income taxes on couples making $250,000 or more or individuals making $200,000 or more. First, let’s be clear, $250,000 of income does not make you a millionaire. I’ve counseled with hundreds of couples with big incomes and a small net worth. We’re being told that the rich are not paying their fair share of federal income taxes while the poor and middle class are paying a disproportionate share. However, under our current tax system, the top ten percent of households pay a whopping 68% of the federal taxes collected while the bottom 40% of households pay little or no federal taxes at all!
Here’s an analogy I pulled from the Internet that explains our current tax system in a way that every good beer-drinking American can understand:
Suppose that every day ten men go out for beer and their total bill comes to $100. If they paid their bill the way we pay our taxes it would look 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; and the tenth (the richest) would pay $59.
So that’s what they decided to do. The men met in the bar every day and seemed quite happy with the arrangement until the bar owner said, “You are such good customers I’m going to reduce your daily bill by $20.” The group wanted to continue paying their bill the way they paid their taxes so the first four continued to drink for free. But what about the other six men…the paying customers? They realized that $20 divided by six was $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 beer. So the bar owner suggested that it would be fair to reduce each man’s bill roughly in the same proportion as before and he proceeded to work out the new amounts.
Under the new arrangement the fifth man, like the first four, would now pay nothing; the sixth man now paid $2 instead of $3; the seventh now paid $5 instead of $7; the eighth now paid $10 instead of $12; the ninth now paid $14 instead of $18; and the tenth now paid $49 instead of $59.
Each of the six was better off than before and the first four continued to drink for free but once outside the bar, the men began to compare their savings. “I only got $1 out of $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!” shouted the first four men in unison. “We don’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 had beers without him. But when it came time to pay the bill, to their shock, they discovered they didn’t have enough money between them for even half the bill!
And that, my friends, is how our tax system works. The people who pay the highest taxes do get the most benefit from a tax reduction. They also pay more than the rest. 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!
One notable example was Tennessee-born, self-made billionaire Sir John Templeton who renounced his U.S. citizenship in 1968 because of what he believed was confiscatory income taxes. Many of our corporations have also moved their operations overseas to avoid taxes.