Monday, October 20, 2008

On Class Envy

Pardon my personal distress but for the first time in my memory, we have a major political figure campaigning on class envy. Barack Obama is declaring war on those making $250,000. These are individuals and small businesses. He is banking on the fact that their numbers are smaller than the electorate at large and that because of the sour economy, there are those who wish to punish the more successful. My father once told me not to envy those who were better off but work hard to become someone that others envied. Where has that gone? Instead, Obama wants to

 1. Raise the income tax rate for those earning $250,000 and above. Joe Biden calls this “patriotic” while Obama says we need to “spread the wealth”.     

  2. Raise the corporate tax rate.

  3. Raise the capital gains tax.

  4. Increase the social security payroll tax.

 5. Give a transfer to most and call it a tax “cut” even though rates are not changed.

This is idiotic – not patriotic. If he gets these things done, he will be a one term president leaving the country even more deeply divided. Obama wants to kill the golden goose that is the US economy. He needs to read  R. A, Radford’s “The Economic Organisation of a POW Camp”, Economica, November 1945. ( This paper greatly influenced me to major in economics when I read it as a sophomore many years ago. The POW camp is Obama's perfect socialist world. All prisoners have the same income (a care package delivered monthly from the Red Cross). Yet there are different levels of wealth due to differences in tastes and preferences. Some prisoners are poor, others are middle class and still others a rich. Some are entrepreneurs while some gamble away their income. In the end, the income/wealth distribution looks amazingly familiar to us. 

If Radford is too difficult a read, then how about “How taxes work” whose authorship is the subject of some controversy. If the author reads this and contacts me, I’ll give proper credit where credit is due. 

Subject: How taxes work 

Sometimes politicians can 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, we hope the following will help. 

Tax Cuts - A Simple Lesson In Economics 

This is how the cookie crumbles. Please read it carefully. Let's put tax cuts in terms everyone can understand. Suppose that every day, 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 among 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 and go somewhere else to eat. There are lots of good restaurants in Switzerland and in the Bahamas.

See what the sainted William F. Buckley had to say on this parable





Noel Barnard said...

Great article. It's just too easy to say "make the rich pay for it, they have plenty already." How much more of the burden can they shoulder? Politicians are doing the American people a disservice by perpetuating this "stick it to the rich" mentality. They are telling us go ahead, get rich, and we will villify you.

David J. Moore, Ph.D. said...

First, what happened to the comment I submitted for the "Slack no more" article?

Okay, can you explain the rationale behind the 1986 tax reform act? Begin by confirming that the top tax rate was reduced from 50% to 28% and the lower tax rate was increased from 11% to 15%. I do not see how everyone is better off from this particular form of tax reform.

David J. Moore, Ph.D. said...
This comment has been removed by a blog administrator.