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Author: acm4tax Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: How tax cuts "work" Date: 10/23/2004 2:09 AM
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If you have any friends or relatives that don't understand how tax cuts
"work" they might benefit from this explanation.

Tax Cuts Explained

Let's put tax cuts in terms that 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 (29% 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 $50 instead of $59 (15% 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 $9!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a
dollar too. It's unfair that he got nine times more than me!"

"That's true!!" shouted the seventh man. "Why should he get $9 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.
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Author: motleync One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73860 of 121114
Subject: Re: How tax cuts "work" Date: 10/23/2004 11:35 AM
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Thank you. This is the absolute perfect rebuttal to an otherwise undemocratic argument against taxation. I'm sad to say that I'm not the "rich" guy, but I still understand that they are helping me eat dinner without going broke.

Thanks again,
mnc

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Author: HamletsMill Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73862 of 121114
Subject: Re: How tax cuts "work" Date: 10/23/2004 7:49 PM
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"Tax Cuts Explained" has been floating around the Internet for so many years I would have thought it would be waterlogged by now.

Perhaps the simplest, and profoundest, answer to the fundamental question posed by it was said by Theodore Roosevelt.

“The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government.”

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Author: fleg9bo Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73864 of 121114
Subject: Re: How tax cuts "work" Date: 10/24/2004 2:00 AM
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I would rather go with a Nobel Prize winner in economics than a politician.

http://www.techcentralstation.be/101504J.html

During an interview last week on CNBC financial television, Dr. Prescott told the audience that, "What Bush has done has been not very big, it's pretty small" in terms of bringing down federal income taxes. But Prescott went further, saying, "Tax rates were not cut enough" and noted "Lower tax rates provided an incentive to work."
____________________________________________________________

--fleg

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Author: HamletsMill Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73865 of 121114
Subject: Re: How tax cuts "work" Date: 10/24/2004 2:53 AM
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"Economics is the only field in which two people can share a Nobel Prize for saying opposing things."

Specifically, Myrdal and Hayek shared one.

I find his remarks rather ironic, considering that his seminal work is centered on the idea that policies that yield short-term benefits are negated in the future by changes in expectations. Or in other words, quick fixes invariably get canceled out by changes in behavior.
"Real business cycle theory" -- Prescott's balliwick -- has some interesting points, and in the case of applying more rigorous mathematics to certain problems has made a real contribution, but like all forms of blackboard economics, it has its problems when it runs into the manifold complexity of modern civilizations.

I would rather go with an experienced engineer than a theoretician when building bridges...


Purely an aside, did you know that Theodore Roosevelt also was a Nobel Prize winner?

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Author: bacon Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73866 of 121114
Subject: Re: How tax cuts "work" Date: 10/24/2004 8:18 AM
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The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government.

This rob-from-the-rich-and-give-to-the-poor idea makes for good theater, but it remains the stuff of socialism and of noblesse oblige claptrap. The man of great wealth has the same rights--and obligations--as the rest of us. The fact that TR is the source of this quote doesn't make the quote any more true. We don't need any more class warfare then Senator Kerry already is trying to inflict on us.

Eric HInes

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