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Author: mhirschey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212971  
Subject: Tax policy Date: 2/28/2007 3:28 PM
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Suppose that every day, ten guys 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 guys (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 guys drank in the bar every day and seemed quite happy with the arrangement, until on 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 guys were unaffected. They would still drink for free.
But what about the other six guys - 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 pay $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 guys
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 guys in unison.

"We didn't get anything at all. The system exploits the poor!" The nine guys 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.

For those who understand, no explanation is needed. For those who do
not understand, no explanation is possible.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

Mark
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Author: MacNugget Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127895 of 212971
Subject: Re: Tax policy Date: 2/28/2007 6:20 PM
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Suppose that every day, ten guys 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. . .

have to say that the analogy broke for me right here at the very beginning. This little anecdote has been around for a while and I can only presume it dates back to some time between 1998 and 2001 when the federal budget last reported a surplus.

To make this story fit as an analogy to today's taxes, it needs to be amended to account for the over 350 billion dollar budget deficit we're looking forward to in 2007. To make this work, let's recast the story as follows...

...The bill for all ten comes to $100. The men agree to only pay $87 of the bill, leaving the rest to be paid some time later, perhaps by their kids.

Given this context, it's not hard to see why there would be confusion and protest over why the tenth man felt that he should really be paying less for the meal, no matter how the bill ultimately gets divided.

I wish our elected officials didn't need this bit explained to them.

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Author: ranshdow Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127897 of 212971
Subject: Re: Tax policy Date: 2/28/2007 7:44 PM
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In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

As far as the tax code is concerned, rich Americans overseas still pay for their domestic brethren's beer.

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127899 of 212971
Subject: Re: Tax policy Date: 2/28/2007 8:09 PM
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David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia



http://davidk.myweb.uga.edu/

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127900 of 212971
Subject: Re: Tax policy Date: 2/28/2007 8:34 PM
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"The most recent version that has circulated on the Internet attributes it to David R. Kamerschen, a professor of Economics at the University of Georgia.

On his web site, however, he denies that he wrote it and says he doesn't know who did. How his name got attached to it, he does not know."

http://www.truthorfiction.com/rumors/t/taxcuts.htm

"I originally gave credit to David R. Kamerschen, Ph.D - Professor of Economics - University of Georgia as being the author of this piece but an alert visitor to the site spotted the error and referred me to Dr. Kamerschen's online bio. The first line of his bio is devoted to disavowing authorship of this piece."

http://rogerandbrenda.com/seclevel/tax_cuts_wealthy.htm

Id.

http://www.snopes.com/business/taxes/howtaxes.asp

Nice try.

Now how about supporting your post.

"If they paid their bill the way we pay our taxes"

Who is the "we" in the second paragraph?

And what "taxes" is referenced in the second paragraph?

If it is focused solely on federal income taxes, then the statement is misleading because it does not identify income taxes. FICA is also a tax paid on earned income; why would you ignore it (except for purposes of skewing the piece)? FICA is also not paid on unearned income, and the rate reduces signifcantly for larger incomes.

I also not that it entirely ignores the income distribution. According to the Tax Foundation, for 2004, the top 10% (the tenth man in your example) reports 44.35% of all AGI. http://www.taxfoundation.org/taxdata/show/250.html

And the top 50% (the sixth-through tenth men in your example), report
86.56% of all AGI. Id.

The ugly reality is that except for the top 10%, no decile pays a larger percentate in federal income taxes than it reports in total AGI. And even for the top 10%, it is mostly only the top 5%; those in the top 10% but below the top 5% reported 10.90% of total AGI for 2004 and paid 11.07% of federal income taxes. Id.

A "flat" tax that grants any kind of personal exempion amount and standard deduction equivalent will not raise taxes paid by the lowest AGI, but will generally raise the amount of taxes paid for everyone outside the top 5% (and more probably outside the top 1%).

Average federal income tax rate for 2004:

In top 5% but below the top 1%: 16.95%
In top 10% but below the top 5%: 12.28%. Id.

I have not seen any revenue neutral flat tax proposal that calls for rates below 13% and I do not recall any proposing rates below 17%, either.

Regards, JAFO







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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: 127903 of 212971
Subject: Re: Tax policy Date: 2/28/2007 9:59 PM
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I have not seen any revenue neutral flat tax proposal that calls for rates below 13% and I do not recall any proposing rates below 17%, either.

Neither have I. I posted the below a few years ago on another board (probably the wrong one, the people there are not particularly interested in looking at the implemental consequences of their beliefs). While self-quoting is not the most attractive thing to do, it was as a good a summary of the flat tax as I can come up with.


"The last serious (minor key serious, it went nowhere) proposal for a flat tax system for the United States was introduced by then Congressman Dick Armey in 1998.

His proposal briefly:

1. 17% flat rate on individuals. This would be have to be phased in over several years, starting with a 20% rate if the goal is revenue neutrality, and expenditures are capped. No cap on expenditures and the rate would have to stay at 19-20%.
2. All wages, salaries, and pensions would be taxable. Married couples would get a deduction of $26,200, single taxpayers would get $13,100, single head of family would get $17,200. In addition there would be a per child dependent deduction of $5,300. There would be no taxes on interest, dividends, or capital gains.
3. No other deductions – no charity, no medical, and most significantly, no mortgage interest deduction.*

A second aspect that is less discussed is that Armey proposed the same basic flat tax structure for corporations. 17% rate for business based on their income after wages, purchases of good and services used in business, and interest income.
No expensing of employee non-wage benefits at all.
Companies that pay no Federal taxes, and have tax credits from earlier years of losses, would be out of luck.

Obviously, while the flat tax as outlined by Armey would have the advantages of great simplicity, there would be winners and losers.

1. Households who can get their income purely from interest, dividends, and capital gains would pay no taxes at all. (Unless some version of the Alternative Minimum Tax was enacted as well.)
2. Single taxpayers in the 2nd and 3rd quintiles of income may very well end up paying somewhat more in taxes then they are currently.
3. The effect on the housing and financial services industries with the repeal of the mortgage interest deduction is unclear, but likely to be unfavorable. (I should say that there are counter-arguments in this regard, but most of them were made prior to the current housing boom, and creative financing that has accompanied it)
4. The repeal of capital gains taxes would also end the deduction for capital losses. Those who have reported such losses in the past would lose any benefit.
4. There would be somewhat of a shift in overall taxes paid from the top 20% onto the next 20%, and similarly from the bottom 20% up to the middle 20%.
5. There would be a negative impact on local governments: The after tax advantage of State and municipal bonds would lowered, causing issuing entities to have to offer higher yields; resulting in either increased taxation to pay for the higher rates, or less services, or both.


Since it is very unlikely that the Federal government would be willing, or even able, to cap expenditures, a real world 19 to 20% rate is the most probable one.
As for the argument that there would be a positive national economic effect from switching to a flat tax, I am currently agnostic."

* One benefit for a flat corporate tax that might create some wider appeal across political divides is that it would effectively end the selective tax benefits aspect of what critics have called "corporate welfare."

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Author: karensie Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127904 of 212971
Subject: Re: Tax policy Date: 2/28/2007 10:27 PM
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I have posted this before.

Scrap earned income, unearned income, and capital gains taxes.

Institute a national sales (consumption) tax.

Reduce the "underground economy".

Encourage saving and investment.

No more IRS

No more April 15 Turbo Tax "all-nighter".

(:>)

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127905 of 212971
Subject: Re: Tax policy Date: 2/28/2007 10:55 PM
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No more April 15 Turbo Tax "all-nighter".

Who the heck's fault is that? Most people can probably have their taxes done by Feb 15th with any effort most years. I'm done, but need to wait for some corrected 1099s to confirm some things before I file.

To not get into a political argument, I'll leave it at that :)


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Author: maracle Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127910 of 212971
Subject: Re: Tax policy Date: 3/1/2007 1:37 AM
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I have capital gains, a regular job, a duplex, and some mineral rights and it still only takes me about 2 hours to do my taxes. The only other common complications that come to mind are kids and a marriage but I really don't think it would add significant amounts of time. Unless you have something particularly unusual like trusts going on, its not that big of a deal.

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Author: TaoFelix 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: 127913 of 212971
Subject: Re: Tax policy Date: 3/1/2007 6:44 AM
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Suppose that every day, ten guys 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 guys (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.



This story presumes that everyone receives an equal benefit from the government, i.e.one beer. That's obviously not true. Poor analogy.

Howabout... "Suppose that every day, ten guys go out for drinks, two or three can't afford any, a few order up beers, one or two buy a bottle of wine and one guy purchases a case of champagne..."



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Author: MrCheeryO Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127914 of 212971
Subject: Re: Tax policy Date: 3/1/2007 7:18 AM
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...have to say that the analogy broke for me right here at the very beginning. This little anecdote has been around for a while...

No kidding, about as long as TMF and this board. Which used to be kind of an original and interesting spot to see what's what. Obviously no longer, readers insulted by pap like that.

Granny Mom and Dad take the kids out to a nice restaurant for dinner.

"Order anything you want!", says Dad Bush. "I calculated the cost of this dinner, my Plan to Pay is juuuuust right!".

The bill comes for the feast, Dad's credit card is declined and he and Mom and Granny duck out and leave the kids behind to wash dishes to pay for their food while they are forced to listen to a repeating tape of Ben Bernanke pontificating about stormy calms and Warren Buffett's thoughts on Squanderville.

Finis.

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Author: Tiddman Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127916 of 212971
Subject: Re: Tax policy Date: 3/1/2007 7:50 AM
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Ron Muhlenkamp writes some of the best financial newsletters I've ever read. They are very insightful and make complex things simple, much like Buffett's. Here is what he wrote on this topic, though he turned it around into looking at it as a work incentive program. The comments were written in 2000, and are interesting in light of the current administration's policies.

The best explanation I've found for "The Reagan Lesson" came
from a friend of mine, a professor of economics at Duquesne
University. In 1980 he posed the question to me as follows:
"Suppose you work a 5-day week, what you earn on Monday you
pay 10% in taxes; Tuesday you pay 20% in taxes; Wednesday
you pay 30% in taxes; Thursday you pay 40% in taxes; Friday
you pay 50% in taxes. Would you come to work on Friday?"
In the past 20 years, I've asked this question of several thousand
people. Until three years ago 2 - 5% of listeners would raise their
hand. In the last three years, exactly one person raised his hand.

It took an economics professor to explain work incentives to
me in terms I understood, but my teenage daughters figured it
out for themselves. When they were 13 and 14, I hired my
daughters to keypunch for me in the business. I paid them
$5.00 an hour at a time when they could earn $2.50 an hour
babysitting. After watching them spend the money on movies
and clothes etc., I suggested they should save, not spend, half
of what they earned working for me. But the next time I asked
them to work they weren't available, or the next. My daughters
weren't interested in working under a 50% tax rate (as
perceived by them) even though the "after tax" rate was as great
as they earned elsewhere.

From my teenage daughters, I learned that "frivolous" spending
was, in fact, their incentive for working. Think of it this way,
what encourages you to work overtime and produce more? Is it
basic food, clothing and shelter; is it discretionary goods like a
better car, a better house or a better vacation; or is it so you can
pay more taxes and the government can spend more money? In
Japan, for ten years the government has tried to jump-start the
economy by building more roads and bridges. The prescription
is straight out of my economics book from the 1960s. It hasn't
worked. It's why we wrote in Muhlenkamp Memorandum #45
"Asia (Japan) needs a Ronald Reagan."


The whole newsletter (as well as the rest of his newsletters) are very much worth a read.

http://www.muhlenkamp.com/fund/memorandum/pdf/news56.pdf

http://muhlenkamp.com/fund/memorandum/memorandum_archive.php

T

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Author: JeanDavid Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127917 of 212971
Subject: Re: Tax policy Date: 3/1/2007 8:21 AM
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No more April 15 Turbo Tax "all-nighter".

Who the heck's fault is that? Most people can probably have their taxes done by Feb 15th with any effort most years. I'm done, but need to wait for some corrected 1099s to confirm some things before I file.


I do not wait until April 15, but I do wait quite a while. First of all, they continually update TurboTax on line and I like to wait until the update rate simmers down.

Second, even though all the 1099's, etc., are supposed to be mailed out by the last day of January, they trickle in until much much later than that, and one seldom comes in until March, if at all. And one does not come in at all unless I specifically ask for it each year.

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Author: Tiddman Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127918 of 212971
Subject: Re: Tax policy Date: 3/1/2007 8:24 AM
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Second, even though all the 1099's, etc., are supposed to be mailed out by the last day of January, they trickle in until much much later than that, and one seldom comes in until March, if at all. And one does not come in at all unless I specifically ask for it each year.

Last year I got updates as late as March 22, which was a real hassle. I just talked to TD Ameritrade yesterday and they will be mailing out another update in a day or two. I have learned not to finalize everything until pretty close to the deadline. It is usually possible to do most of the legwork ahead of time though, and then just plug in the revised numbers when the 1099's roll in.

T

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127927 of 212971
Subject: Re: Tax policy Date: 3/1/2007 9:51 AM
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I do not wait until April 15, but I do wait quite a while. First of all, they continually update TurboTax on line and I like to wait until the update rate simmers down.

If you understand your taxes this should not be an issue. Enter your information, print out the forms and confirm they're right. If they're right, then no future updates will effect you anyway. If you still want to wait to file, you can, but that would hardly require an "all-nighter".


Second, even though all the 1099's, etc., are supposed to be mailed out by the last day of January, they trickle in until much much later than that, and one seldom comes in until March, if at all. And one does not come in at all unless I specifically ask for it each year.

Do you hold REITs or something complicated in these accounts? I hold REITs only in my IRA for this very reason (401k/403b, etc would work fine too). The tax tracking is complex, its tax inefficient, and it comes in late. What are the accounts that do this and why?

The IRS *insists* that they mail the 1099s by January 31st, its not an option. Unless they get an exception. And if you're holding lots of things in your accounts that need exceptions, you may wish to reconsider that. And if they don't have any good reason, report them.

But even if all this is the case, it still doesn't make for an all-nighter on April 15th. I'd say a couple hours in mid-March should do it.


Last year I got updates as late as March 22, which was a real hassle. I just talked to TD Ameritrade yesterday and they will be mailing out another update in a day or two. I have learned not to finalize everything until pretty close to the deadline.

Finalizing it near the deadline is one thing, but, again, that shouldn't require an all-nighter. Enter what you know is right, or wait until April 1st and spend a few hours. But, again... all-nighter? Only yourself to blame.

(And if you don't have all the information you need by April 1, no reason you can't file for an extension right then), giving yourself an extra few months.

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Author: JeanDavid Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127930 of 212971
Subject: Re: Tax policy Date: 3/1/2007 10:17 AM
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The IRS *insists* that they mail the 1099s by January 31st, its not an option. Unless they get an exception. And if you're holding lots of things in your accounts that need exceptions, you may wish to reconsider that. And if they don't have any good reason, report them.

The one that comes first to mind was a mutual life insurance company that did not seem to send out a 1099-DIV until March. Since then, they have demutualized, giving me some dividend-paying stock. They sent me the 1099-Div for the dividends on time.

But even if all this is the case, it still doesn't make for an all-nighter on April 15th. I'd say a couple hours in mid-March should do it.

I agree about all-nighters. It may take me three hours. I do not know, since I do stuff as it comes in, and never totalled up the time. An all nighter would be required only if you do not start until after dinner and the favorite TV programs or something.

My taxes used to be very complex, taking several full days to fill out the forms manually, but over the years I have been simplifying my finances to the point where, in another year or two, I should be able to dispense with TurboTax entirely and file manually. Then I could stop running Windows on my other computer entirely.

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Author: slowwhizz Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127933 of 212971
Subject: Re: Tax policy Date: 3/1/2007 11:30 AM
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I wish our elected officials didn't need this bit explained to them.


Our elected officials don't really care about facts. They wish to pit the four or five freeloaders against the 10th person to win more votes to stay in office.

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127937 of 212971
Subject: Re: Tax policy Date: 3/1/2007 1:23 PM
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It took an economics professor to explain work incentives to me in terms I understood, but my teenage daughters figured it out for themselves. When they were 13 and 14, I hired my daughters to keypunch for me in the business. I paid them $5.00 an hour at a time when they could earn $2.50 an hour babysitting. After watching them spend the money on movies and clothes etc., I suggested they should save, not spend, half of what they earned working for me. But the next time I asked them to work they weren't available, or the next. My daughters
weren't interested in working under a 50% tax rate (as perceived by them) even though the "after tax" rate was as great as they earned elsewhere.


This is dumber than the original story of the beers, and that is saying something.

There are two different jobs. One involves sitting around doing nothing for $2.50 an hour. The other involves sitting at a keypunch machine, squinting and typing in forms, also for $2.50 an hour. Great comparison.

Let's reset the story and say "You have to save $1.00 per hour" from the $5.00 job, or 25¢ per hour from the $2.50 job and see what the teenagers do. Better than that, let's say "and that the $1.00 per hour, or 25¢ per hour will be used to make the keypunching job easier and more productive for you." (That would include such things as assisting basic research, transitioning the internet to public use, improving basic infrastructure, and all the other things that government does with 'that dollar.') Of course the teenagers still wouldn't like "investing" that dollar, but then teenagers, like the people who put up such ridiculous stories as "beer" and "babysitting", never seem to understand that taxes are, in fair part, what has given us the society we enjoy today.

No, they'd rather get that short-term $2.50 today and spend it on a DVD player made in Korea, rather than get more kids to go to college in the US, or buy a bigger bag of jellybeans rather than insure the safety of the very savings system which protects their investments.

In Japan, for ten years the government has tried to jump-start the economy by building more roads and bridges. The prescription is straight out of my economics book from the 1960s. It hasn't worked.

It's a darn good example. Perhaps he could expand his frame of reference to include the period 1946-1990, when Japan outgrew almost every other economy in the world, largely based on tax policy and a structure of government which worked with, and helped business with the underpinnings of an advanced society (including a road and rail structure the envy of the world.) I understand it's better for his argument to look at just the 10 year period he likes, but that would be something like condemning capitalism because of the 1930's, wouldn't it?

BTW, is there someone who is in the 50% tax bracket, like the babysitting example? Mrs. Goofy and I are in the top tier, and our effective rate is less than 25%. Perhaps an example which posits a 50% confiscation should labor to demonstrate how that is relevant.

Our elected officials don't really care about facts. They wish to pit the four or five freeloaders against the 10th person to win more votes to stay in office.

Right. 50% of the population are freeloaders. You might want to look up "hyperbole", and then refrain from using it quite so much. Just a thought.
 


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Author: MacNugget Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127938 of 212971
Subject: Re: Tax policy Date: 3/1/2007 1:25 PM
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Our elected officials don't really care about facts. They wish to pit the four or five freeloaders against the 10th person to win more votes to stay in office.

That's not the bit I was talking about but thanks for the "insight." With such a nuanced perspective on politics you've quite a future writing bumper stickers if this whole Berkshire thing doesn't work out for you.

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Author: Tiddman Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127945 of 212971
Subject: Re: Tax policy Date: 3/1/2007 2:57 PM
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There are two different jobs. One involves sitting around doing nothing for $2.50 an hour. The other involves sitting at a keypunch machine, squinting and typing in forms, also for $2.50 an hour. Great comparison.

Why don't you come over to my house sometime and watch my kids for an hour, and see if you consider it "sitting around doing nothing". You'll be begging for a keypunch machine. I pay more than $2.50/hr by the way.

Of course the teenagers still wouldn't like "investing" that dollar, but then teenagers, like the people who put up such ridiculous stories as "beer" and "babysitting", never seem to understand that taxes are, in fair part, what has given us the society we enjoy today.

Well it isn't just teenagers, which is the point of the story, it is almost all workers. Sure everyone wants to do something to help soceity, but if someone threatens to take $50 out of your paycheck for what they call "the good of society", is your first reaction to simply believe them and hand it over? Wouldn't you ask some questions about where the money is going, how inefficient the bureaucracy is, whether or not you agree with the political views of the current administration? Wouldn't it be simpler to put that money in your pocket and benefit yourself or society as you see fit?

BTW, is there someone who is in the 50% tax bracket, like the babysitting example? Mrs. Goofy and I are in the top tier, and our effective rate is less than 25%. Perhaps an example which posits a 50% confiscation should labor to demonstrate how that is relevant.

50% is just a round number that makes for easy examples. The top federal tax bracket is 35.0% and the state income tax rates go up to about 9.3%, and 44.3% isn't too far from 50%.

And yes this is the marginal rate, which is also part of the point, with the "Monday through Friday" comment. There is an incentive to stop raising your earned income because the rate increases.

T

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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: 127947 of 212971
Subject: Re: Tax policy Date: 3/1/2007 3:54 PM
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Scrap earned income, unearned income, and capital gains taxes.

Institute a national sales (consumption) tax.

Reduce the "underground economy".

Encourage saving and investment.

No more IRS


While replacing an income tax with a consumption tax has a great deal of appeal; the practical implementation would likely result in a complex system of exemptions and adjustments and refunds, etc, that would, in the end, result in a situation not too far removed from what we currently have.

A couple of examples:

John rents his home for a $1000 a month – he is taxed on that amount; paying for the use of the house is a consumption.
Jane is paying a mortgage of $1000 a month on her home – she is not taxed; paying off a debt is not consumption.

So, unless you exempt rent from the list of financial transactions that involves goods and services, the system is skewed to benefit one group over another.

Assuming that revenue neutrality is a goal (how much the Federal government should collect and spend is another topic – tax reform discussion should properly deal with process only), the sales tax rate is likely to be about 20-25%, depending on whether you exempt other basic necessities such as food and clothing along with shelter. That would functionally increase the average tax rate for about 2/3rds of the population

So, unless you have a tax credit mechanism, a rebate, or incorporate a progressive rate into the tax (perhaps a incremental increase in the base rate dependent on how much the good or service deviates upward from a stand product benchmark – very complicated), you end up with what most would consider an unacceptable shift in the tax burden.

There are a number of other issues with a national sales tax – arguably if we want to go that route, a VAT tax approach might be better.

I don't see how a consumption tax would reduce the informal, “black”, economy. If anything, it might encourage it. It's easy to see how more desirable ah, cash in hand, transactions might become.

One final thought: Yes, such a system possibly could have the effect of increasing savings and investment – with the unintended consequence of reducing tax revenue, resulting in increases of the tax rate. Call it a virtue to vicious cycle…


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Author: SuaSponteMark Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127996 of 212971
Subject: Re: Tax policy Date: 3/1/2007 9:37 PM
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One involves sitting around doing nothing for $2.50 an hour.

---

What is equally dumb is that a childless person would have the moxie to think that taking care of kids involves no work,

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Author: smtrotter One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 128154 of 212971
Subject: Re: Tax policy Date: 3/4/2007 2:38 AM
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What is equally dumb is that a childless person would have the moxie to think that taking care of kids involves no work,

I thought we had gone over this, it it moving sacks of potatoes around a warehouse that requires no work. Not child care.

-Sean

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 128776 of 212971
Subject: Re: Tax policy Date: 3/25/2007 11:14 AM
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Scrap earned income, unearned income, and capital gains taxes.
Institute a national sales (consumption) tax.
Reduce the "underground economy".
Encourage saving and investment.
No more IRS
...

While replacing an income tax with a consumption tax has a great deal of
appeal; the practical implementation would likely result in a complex
system of exemptions and adjustments and refunds, etc, that would, in the
end, result in a situation not too far removed from what we currently have.


If you're speaking of a "practical implementation" in the US, well,
I'm no judge, you may be right. But if you are speaking about
a "practical implementation" in the general sense, you might be surprised.
I live in the Principality of Monaco. There is no income tax on
any sort of income, period, and more importantly, there is no
income tax return. Since there is no return, there is no
system of adjustments, rebates etc. For that matter, the government
doesn't even know what anyone's income is, other than pure salary
earned locally, which employers report. No property tax either.
About half of the government's revenue comes from sales tax, about 4% from
the casino, and most of the rest comes from a flat 33% corporate income tax.
(a 0% corporate rate for industries deemed to have essentially all their
customers local...bakeries, restaurants etc).
There is a land transfer tax, and a payroll tax, but they are relatively
minor in magnitude of budget contribution compared to the aforementioned.
It can, and does, work.

Incidentally, having now experienced this situation, I can say with some
confidence that the increase in happiness from not filing a tax return
is considerably greater than the increase in happiness from not paying the tax.
This sounds like a frivolous comment, but is not. The aggregate
increase to global happiness by switching to consumption taxes would be
on a par with, say, the invention of antibiotics.

From the point of view of an economist, taxing consumption rather than
income has several huge advantages, but one major thing which needs to
be addressed: if a country switches to a consumption tax from an income
tax, those of the generation who are then at the peak of their savings
will be taxed more heavily than those of prior or subsequent generations:
they paid tax on their income, then pay again when they spent it.
Other generations do only one or the other.
Another small disadvantage is that income redistribution, to the extent
that one believes such a thing should transpire, can not be done inside
the income tax system, since there isn't one. There are other ways, though.

Jim

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