The Tax System - Explained With Beer

Special thanks to Mike N. for sending me this column:

Suppose that every day, ten men 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 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.
• The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar 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 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 men were unaffected. They would still drink for free. But what about the other six men -- 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 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 two? 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 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 any more. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

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What the Left Will Never Get

An article in The Daily Beast today reads, in part, thus:

"President Obama’s 2012 budget, set for release on Monday, projects a $1.65 trillion deficit this year—the largest on record.
[snip]
Before you buy Republicans’ complaints about the deficit, however, keep this in mind: The main reason this year’s deficit is larger than expected is the deal to extend the Bush tax cuts, which the GOP pushed for."

Now, the Daily Beast is not known for being a paragon of unbiased reporting. Just last week, they crowed, in an article entitled "The Myth of Obama's Big Spending":

"Obama has slashed one tax dollar for every dollar he’s spent on government programs."

The Left, as well as the media elite, love to deride the Tea Party, calling them all sorts of names and portraying them alternatively as know-nothing rednecks or gun-toting domestic terrorists. It has been intuitively obvious that those who engage in these one-dimensional characterisations have no idea what the Tea Party movement was or is all about, nor have any idea of the reasons for the failure of so many incumbents (Democrats and Republicans) in last fall's elections. They miss the point, entirely.

The point of the Tea Party movement was and remains to hold Congress to the same standards that each one of us is held to; to hold them responsible for their spending; to hold them accountable for their actions and their promises. It is a rejection of "business as usual". It is not Left, it is not Right, it is not Liberal, it is not Conservative. It is a movement of, by and for the People to enforce their control -- their Constitutionally-guaranteed control -- of their Government.

So as budget time looms, those who lost power are, as predicted, trying every tactic to slander and change the facts. They are deliberately missing the point that lowering taxes is only one half of the equation. Without cutting spending significantly, we will continue to be in a status quo.

Think of it this way -- if you're getting paid $50,000 per year and your expenses are $60,000 per year, how much does it help to get a raise of $3,000 per year if you don't cut your spending? You're still in the hole and sinking, just not as fast! Ah, but you say, "Ok, I'll cut a dollar of spending for every dollar of my raise!" So now, you're cutting your spending to $57,000 per year and you've increased your income to $53,000 per year. Um.... you're still sinking!!!

Congress and the administration must be held accountable. We all have to learn to live within our means or we go broke. Government is the only entity that has been held exempt from that, and they're the ones who gave the exemption! They force everyone else to be solvent, but not themselves.

The People spoke, last November. They sent a message to their elected officials -- play by the rules we have to play by or be replaced, regardless of your party affiliation. We were and are sick of "business as usual" of the last two decades of Congress.

As I said when I started this blog, "There is one and only one thing that strikes fear into the heart of any politician - that is We the People." And a scared animal lashes out.

So take heart; the entrenched power elite are running scared. That sound of hoofbeats? It's We the People.

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Cause and Effect

In the December 11, 2010 Appleton Post-Crescent, Caroline Seidl of Appleton comments in the phone editorial:

"Congratulations go out to Plexus for adding two overseas sites while hundreds of thousands of U.S. citizens are out of work and losing their homes. Thank you, big business, for sticking it to us once again."

What a wonderful case-in-point of the "dumbing down" of America -- people like Caroline who can't see from Point A to Point B. The saddest part is that these people do not, nor ever will understand that our Universe is one where effect inevitably follows cause.

The Administration has, over the last two years, levied huge taxes and fees on the "evil corporations". People like Caroline cheered this, because they are getting "something for nothing." And yet, when those "evil corporations" decide, in the interest of staying afloat, to move operations overseas, these same people like Caroline scream about how the jobs are leaving the U.S.

By Caroline's thinking, "profit is evil" and yet when profit (and therefore the corporation) is eliminated, that's evil as well. You can't have it both ways, Caroline. Punish the corporations, add more burden, and those jobs will go away as the corporations fight for their lives.

People like Caroline are no different than those who who lined up for "Obama money" -- they don't know or care where it's coming from because they can't draw the straight line from point A, Cause, to point B, Effect. You'd hope that some basic courses in Logic would help, but that's a false hope. Because the positions of the left are predicated on "feelings", not thought.

To paraphrase the old saw, "Liberalism wasn't reasoned in, so it can't be reasoned out."

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The Poor Woman and the VAT

[Luke 21:1] As he looked up, Jesus saw the rich putting their gifts into the temple treasury. [2] He also saw a poor widow put in two very small copper coins. [3] "I tell you the truth," he said, "this poor widow has put in more than all the others. [4] All these people gave their gifts out of their wealth; but she out of her poverty put in all she had to live on."

Usually, those who hear this story interpret it as someone giving their all being more generous than those who give just what they can afford. In truth, that's the idea that's being pursued, but there's a much deeper lesson for the taxpayers and citizens of this country.

Faced with a massive deficit and burdened with the costs of the new Health Care program, the administration and Congress (both of whom like the "and spend" portion of "tax and spend" so they must do the "tax" portion as well) are seriously looking into a European style Value Added Tax (VAT). What's that? Well, put simply it turns a "tax" into a "fee".

What happens is that a good or service, instead of being taxed at the time of sale, is taxed all along the line from the point where its created to the point when its delivered. That is, each time "value" is "added", there's a tax. This, then, becomes "hidden" in the cost of the item. So let's say you go to McDonald's for their (damn you, Ronald) highly addictive Iced Coffee. It costs $1.49, plus tax (I disavow all responsibility for knowing this). So, in Wisconsin, that's 5% sales tax. I see $1.49 on the menu and I have to pay $1.56.

In Europe, I'd see $1.56 on the menu, instead.

This is insidious for a couple of reasons.

• What you don't see, you don't think about. That means that you just "see" the $1.56. You don't realize that there's a tax in there. When the price goes up, you don't know if its the Cost of Business, if it's materials, if there's a coffee bean farmer's strike, or if Congress just voted themselves another pay raise.
• That is, this gives Congress a silent, perpetual bank account in the form of the consumer's pocket. They can levy whatever taxes they want and keep up their spendthrift ways without much repurcussion against them. They don't have to blatantly raise taxes that you feel on April 15. Instead, they can just quietly do what they want and you'll think, "Hmm... guess my coffee's a bit more expensive, now."
• Also, bear in mind that this is additional to, not instead of, state and local taxes. Yup, that's right, if this goes through, you'll not only be paying Uncle Sam on April 15th from your wages, you'll also be paying him for nearly everything you buy for your day to day living. And remember that the states, themselves, are facing huge budget deficits of their own, for which they will be raising taxes.
  

The administration and Congress know that there's not nearly enough money for them to fund not only the programs they've already put in place and mandated, but the ones they're now floating like the Dodd Plan. So they have to come up with an "inexhaustable supply" of cash (other than Obama's Stash) and this is their proposal for doing just that. As Jack Welch (former GE CEO) said on his April 15th Twitter,

Don't fall for a VAT tax plan "to get us out of hole"..It is a politicians dream PIGGY BANK

But one has to ask if it does, in fact work, then why not use it? For the answer, let's look at what happens in Europe. It turns out that Europe's VAT, the model for the U.S. lawmakers, is being used exactly as Mr. Welch predicted (and as any reasonably logical person would predict) -- it's a neverending stream of income that depends on subtly and constantly increasing rates.

But JT, what does this have to do with the "Poor Woman" parable?

Well, that's another of the insidious points to this -- it hurts exactly the people its proponents like to say they're helping. But then, this is nothing new. Already, the President has reneged on his pledge to not increase taxes on those making $250k per year. He has to. There's no money left.

But I digress. Remember the mantra of the administration and Congress that all these entitlement programs, including the Health Care bill are "for the poor"? Not so much. You see, a VAT is not a progressive tax. Its an across the board tax that taxes everyone based on their consumption.

I know this can be hard to follow, so let's take it back to the McDonald's analogy.

If I pay $1.56 for a cup of coffee, which includes 5% VAT (in my example), I do it out of $10 in my pocket. If someone not as well off as me, with say $2 in their pocket pays $1.56 for a cup of coffee, they have paid 4% of their available money in tax whereas I've paid less than 1%. They have, in effect, paid four times more than me because they have less to begin with.

A VAT therefore discriminates against those who have less to spend. Like the "Poor Woman", its a larger percentage of her available money than those who have more to spend.

And, in many ways, a VAT is nothing but a trough (excuse the applicable pun). It is, as I've pointed out earlier, a way for the government to go on an eternal feeding frenzy.

Our government has learned the hard way that taxes are a hotbutton issue. They have seen that We the People get a might testy when they tax us. But they need more feed in the trough, so their solution is to hide the source of the feed. Once again, they have attacked the symptom, not the cause. The cause, as so eloquently pointed out and proved by Eisenhower and Reagan, is spending.

Until and unless We the People demand, by ousting the hogs from the trough, an end to the spendthrift ways of our legislature, we will continue to be taxed. And now, we will be taxed without even being aware of it.

I, for one, am sick and tired of this endless cycle. And so, as I've said before, I've come to the conclusion that those who feed and feed and feed at the public trough are through. Using the guidance of our Founding Fathers, I am working actively to oust the incumbents -- all of them regadless of party -- who believe that "tax and spend" is their "right" and have failed to insure the blessings of liberty.

This is what I'm doing. What are you doing?

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Trust Us, We're From the Government

"Buy now, pay later!"

Isn't that the mantra we where from the "discount" stores on TV? It's obvious that this is the attitude of the government when it comes to the Health Care bill. Repeatedly called to account by the constituents (whom they ultimately ignored), people like Nancy Pelosi, Steve Kagen and our "representatives" (I can't use that word without laughing) the response was along the lines of "Don't worry about it. Universal Health Coverage is a good thing. Everyone deserves insurance," and "Oh, we'll know the costs once we get into it."

Um.... WHAT?

I don't know about the Senators and Congressmen, but I have never started a home improvement or other major investment project without knowing the costs up front. And yet we were told "It doesn't matter," and "don't worry about it."

Meanwhile, those who did read the bill and do the math warned that the cost will far outstrip the income. Even the administration admitted after the fact that costs will exceed projected revenues. So what's the response? Add more taxes.

In addition to an already onerous income tax level, the administration and congress has announced that we're in for a Value Added Tax (VAT). This mean that not only will we be taxed on our income, taxed at the state level for sales, but we'll be taxed at the federal level on everything we buy as well.

We have dug ourselves into a massive deficit and, like all holes, you can't get out of it by digging deeper.

But it's not We the People who have dug this hole, its the administrations and legislatures of the last several decades. Our elected officials have betrayed our trust and their duty to "defend and protect the Constitution of the United States" and instead have put the future of the country in peril.

Hold on, though. We need to give it a chance, right? I mean, it hasn't been tried.

Not so much. The Governor of Massachusetts, against the wishes of many of his state's citizens, implemented Health Care Legislation that was pointed to by Congress and the adminitration as the "model" of how this could work for the entire country. It was held up as a paradigm. And so it is.

You see, just months after the Governor made the move to socialize and take over the insurance companies (which he did by, just as ObamaCare will do, setting price controls on premiums, etc.)
the insurance companies have run out of money to pay claims and have had to close their doors, temporarily. That is, you can't get insurance right now in Massachusetts because there's just not enough money anymore. Why not? Because the insurance companies have been forced by the state to underwrite policies on people who they previously would have avoided due to risk.

Oh, but the insurance companies are money-grubbing soulless profit-motivated scumsuckers, right? They were making so much money that they can afford to pay out. Right? They are just a whining bunch of private corporations, right? Sorry, but they are now state agencies! The nanny state of Massachussets owns and runs them and tells them who to provide coverage for. So where, I ask, are the profit motives there?

The fact is that this type of "reform" cannot and does not work. And yet our legislators refuse to acknowledge that fact. They continue to, as my dad would have put it, spend money like a drunken sailor.

But wait, you say, this is the Federal Government. They can't go bankrupt. And they know how to handle risk.

Again... not so much. Consider the housing crisis that lead in no small part to the current economic situation. What were the primary causes? The Federal Government took over lenders by specifically directing them to offer subprime mortgages to people that the lenders would not have, under normal circumstances, taken on as a risk. The lenders were told, "Don't worry about it. More people buying houses is a good thing. Everyone deserves a house. We'll handle the costs when we get into it."

Sound familiar?

But surely they've learned, right?

Well, they took over GM and Chrysler. They gave a $50 billion bailout. And yet the companies, now effectively run by the Federal Government are still $17 Billion in the red for their pension payouts.

This isn't a red state/blue state thing. This isn't a Republican/Democrat thing. Since the end of 80's, our "representatives" (sorry, threw up a little in my mouth, there) all have been on a spending spree. They have mortgaged our future and the future of our children. They have "bought now" and the "later" has finally come. The Health Care bill simply hastened that day.

They have, in direct contravention of their job as stated in the Constitution, failed to "secure the blessings of liberty, to our selves and our posterity."

Every single one of them has been complicit in this betrayal of We the People. And We the People have been complicit by our tacit assent to their shennanigans.

As I have proved beyond a shadow of a doubt, the Founding Fathers gave We the People a recourse. They gave us the Right and Responsibility to rebel, revolt and reform.

People like Bart Stupak (D-MI) have seen the handwriting on the wall. Regardless his claims to the contrary (and those smack of "methinks thou doth protest too much") he has seen that his betrayal of his constituents means that his career is over.

I'm going to make sure that my "representatives" (sorry, I'm holding my nose) know that their time is up as well. We have a chance, albeit a slim one, to stop this mess. So I reiterate that I am committed to my Four Point Action Plan:

1. I have purchased small American flags. Each week I am pinning one upside-down to a piece of paper and sending one each to my Congressmen and Senator with the simple notation "11/2" as a prediction and warning.
2. I am getting involved with a candidate.
3. Through the winnowing of the primary process, I am going to choose and throw my support not just to my canidate but whomever is the closest to my philosophies and opposes the incumbent, regardless of party. We have been betrayed by both parties and all incumbents must therefore be voted out.
4. I am, each week, going to personally and directly ask two people to do these four steps and to ask those people to do them as well. In that way, there will be a groundswell, a snowball of We The People.

This is what I am doing. What are you doing?