Liberals and conservatives battle every year over the budget. There always seems to be a surplus of name-calling and a shortage of understanding. I am going to spend a little time explaining the differences in (hopefully) an unbiased fashion. This explanation involves lots of math, but it's fun and easy math, so get ready.
I am going to focus on one phrase: "Tax cuts for the rich".
Conservatives have been cutting taxes the last 6 years and liberals have accused them of cutting taxes for the rich. Conservatives reply that the new budget is beneficial for the poor. Fact is, both are true. In these cases, liberals are looking at the margin, and conservatives are looking at the end result.
Let's take an ultra-simplified look at this CONCEPT. Reality is, of course, going to be very different; but I hope the concept is at least new to someone out there that didn't understand the debate before. I actually think that the reality inflates the effects of the concept I'm going to explain.
Let's assume you have 2 tax-payers in the U.S. One makes $10,000, and the other makes $100,000. Let's also assume that the tax rate for the person that makes $10K is 25%, and the tax rate for the person that makes $100K is 35%. This is not altogether too far off from our current system. In this scenario, 10K guy will pay $2,500 dollars in taxes, and 100K guy will pay $35,000 in taxes, for a total of $37,500. This means that 10K's taxes of $2,500 make up 6.67% of the tax budget, and 100K's taxes make up 93.33% of the budget. This is also fairly close to reality, although I believe the richest of the rich in America pay a greater percentage of the total budget.
A conservative President is elected and he decides to cut taxes. He says, "Everybody gets a 1% tax break". The liberals say he is "cutting taxes for the rich". Let's take a look at the result:
10K guy is now paying 24% in taxes, or $2,400 dollars. 100K guys is now paying 34%, or $34,000 dollars. On the MARGIN: 10K is paying $100 less, and 100K is paying $1,000 less. That means that both taxpayers are saving a total of $1,100, 10K is saving 9% of the total, and 100K is saving 91% of the total. This is my understanding of why liberals say the tax cuts are unfair, because the richest are getting 91% of the benefit, and the poorest are getting 9% of the benefit.
How do the conservatives see it? First, forget about the margin. The new tax budget is $36,400. 10K is paying 6.59% of the new budget, and 100K is paying 93.41% of the budget. Wait a minute. 10K was paying 6.67% before, now he's paying 6.59%. He is paying LESS of the total budget than he was before. 100k was paying 93.33% of the budget before, now he's paying 93.41% of the budget, he is paying MORE of the total budget than he was before.
Let's mix it up a little bit. What kind of tax cut would be "fair" to a liberal? Well, if both taxpayers getting 1% is not fair, then both tax payers should get the same dollar amount back. If 10K gets $100 back, then so should 100K. That way they each get 50% of the tax cut. There are two ways of doing that, reduce the tax cut to the rich, or increase the tax cut to the poor. Scenario one: reduce the 100K's tax cut from 1% to .1%, and leave 10K's the same. 100K would be paying 34.9%, or $34,900. 100K would save $100, and 10K would save $100... of course, that kind of eliminates the whole purpose of the tax cut. The reason we cut taxes is to stimulate the economy... $100 isn't really going to do much in our make believe economy. The other approach would be to dramatically decrease 10K's tax burden by 10% from 25% to 15%. Now 10K is paying $1,500, and is saving the same $1,000 that 100K is saving. Of course, this wouldn't really work if we changed $100,000 to $1,000,000... because 1M would be saving $10,000, and the only way to make it fair to a liberal would be to change 10K's tax rate to 0% and then give 10K $7,500.
Okay, so what would be fair to a conservative? Well, generally speaking a conservative would think that a 1% tax cut for everyone would be fair, or a flat tax rate would be fair (ie, everyone pays 25%, or everyone pays 15%). Another example would be to keep the tax burden the same as it was before. If we decided (which would be totally arbitrary), that 100K should hold 93.33% of the total tax burden, and we wanted to cut taxes, we would give 10K a 1% tax break, so that his new rate is 24%, and we would give 100K a 1.4% tax break, so that his new tax rate would be 33.6%. That would really send liberals howling.
Well, I just want to thank all the math nerds for making it this far. It's been a blast.
bonus track:
The problem with cutting taxes is that, since the rich are paying the bulk of the taxes, they are going to receive the bulk of the benefit of tax cuts. Eliminating the marriage penalty and the death penalty would probably make the biggest impact on the livelihood of the poor and middle class, but the bulk of the monetary benefit would still go to the rich, so many liberals oppose it. Personally, I think this is cutting off your nose to spite your face. There are only a couple of ways to cut taxes in a way that isolates the poor and middle class AND somewhat excludes the rich. 1) Cut sales taxes for essential items (food and other non-luxury items). This would still disproportionately benefit the rich monetarily, but the poor and middle class would recieve a bigger percentage cut because they devote a larger portion of their income to essentials. 2) Get rid of the lottery. The lottery is an immoral government scam that feeds off the dillusional hopes of the poor and those that can't do math. Not only does the lottery add little to no benefit to society, the government TAXES the winner for the winnings. The state is already making money on the sale of lottery tickets, then it taxes the winnings it gives out. If the state needs the money, they can make it another way. 3) Eliminate the gas tax, cigarette tax, and alcohol tax. The poor and middle class spend a greater percentage of their income on these three things, and eliminating the tax would have a greater benefit to the poor than the rich.
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3 comments:
Another very good post, General. Common sense seems to indicate that the solution that is currently being used is the best one. Anyone disagree?
The only qualm I had with your explanation was the following: Scenario one: reduce the 100K's tax cut from 1% to .1%, and leave 10K's the same. 100K would be paying 34.9%, or $34,900. 100K would save $100, and 10K would save $100... of course, that kind of eliminates the whole purpose of the tax cut. The reason we cut taxes is to stimulate the economy... $100 isn't really going to do much in our make believe economy.
The liberal would say, "Yes, but does giving more money back to the rich necessarily stimulate the economy that same ratio more?" And I think they would also argue that on the scale that the nation's budget is balanced, the equivalent of the $100 would make a big difference, as just as many households would have something extra to spend as if the rich got the same percent back.
You are a great mathlete, the general.
>>Common sense seems to indicate that the solution that is currently being used is the best one. Anyone disagree?<<
I do. Dissolve the IRS and implement a sales tax to promote justice. Low income families get sales tax breaks. Taxing income is foolish because it essentially penalizes you for doing a valuable service. Taxing sales would reward those who are not materialistic. The nation would save millions by eliminating the IRS and the associated costs of navigating the current tax code. Businesses would have to absorb the additional costs from a national sales tax, but it would be worth it.
sales tax...
Well, if all our options are on the table, I definitely agree. In saying that the current "solution" is the "best one", I only meant the current system of tax reductions.
The sales tax is totally the way to go. Exempt essential food and clothing (like Minnesota does on their current sales tax), and we have an extremely fair, rational system.
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