Friday, March 4, 2011

The Wisconsin Protest and the Myth About the Rich and Their Tax Breaks

“It’s not about the money” we here over and over on the evening news as the relay the daily information on the protests in Wisconsin yet in the background you see signs that say ‘Tax the Rich’.  “It’s about gutting collective bargaining” is another popular slogan yet isn’t the essence of collective bargaining all about money? Let me present to you some facts.

Wisconsin public employees contribute less than 1% to their pensions. Walker’s proposal requires public employees to pay 5.8%, still below the national average and that is the average of those who still do have pensions. The majority of Americans don’t have pensions at all.

Wisconsin public employees contribute 6% to their healthcare premiums. Walker’s proposal requires public employees to pay 12%, still less than half the national average of 26%.

Wisconsin’s budget deficit is $137 million. It’s projected to grow to $3.6 billion by 2013.

To me, these deals look almost like the collective bargaining units of Wisconsin have committed highway robbery of the Wisconsin taxpayer and now are upset that the taxpayer through the representatives that they elected are saying no more. It is all about the money and the fact that Wisconsin public employees want to pay far less for benefits than the rest of Americans do.

The solution according to the protesters is not to pay their fair share but rather tax the rich because they get so many 'tax breaks'.  What tax breaks do the rich get? I challenge someone to let me know the answer because honestly I just don't see it. Let's say person A makes $100,000 per year and person B makes $1,000,000 per year. Person A would pay $28,000 dollars in Federal taxes and person B $350,000 in taxes based off the 2010 tax schedules. If by break you mean that they reduce their income to gain a lower tax bracket, the next one down is for people making $373,650 per year and if person B made only $373,649 that year, they would still pay $123,304 in taxes. Everything in our tax code is graduated so that even on deductions, the poorer you are the better. Say person A making $100,000 year got a 20% 'tax break'. They would get $20,000. Now say Person B got only a 5% 'tax break' because they deserve to pay more since they are rich, they would get back $50,000 or $30,000 more than person A. I think people who use the phrase that the rich get all the tax breaks are thinking of that last example and seeing only that person B got $30,000 more than they did and conveniently disregard the fact that person B paid $322,000 more in taxes than person A did.  Remember, the 10% wealthiest people pay 90% of all taxes. The protesters in Wisconsin evidently feel they should pay 95% of all taxes.

Or as I saw in an email that I received awhile back, here is another way at looking at it.

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 pay 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 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 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 anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.


Vince said...

Yes that would work IF wealth was a fixed concept. But it isn't so it doesn't.
The wealth is generated one way or another and it will flow uphill. It does not care who it goes to, it's amoral on that level. But within a State it comes from the bottom not as with you example, the top. You really need to forget about the Gold Standard -it never really worked anyway- and think in terms of transfers. In the case of the State. And by State either Wisconsin or France, the transfers out of the State are far more important that those within.
Put it this way, if the teachers pension pot remained within Wisconsin or France then some costs would be ameliorated, it would act like an investment bank. But most such money funds are run in NYC, London or Singapore, you will have a net outflow of cash from a state. Even in this case of the teachers, most will go south the Spain or Florida which continues the problem after retirement.
Another way of looking at it might be to view Arabia in Google Earth and thing your taxes are being used to build the place.

R. Sherman said...

The top 1% of wage earners pay 95% of all income taxes. Query, if that's unfair to those in a lower bracket, what percentage would be appropriate?

Further, the rational human, would immediately adjust his behavior to fall out of the top 1%. This will happen until there's nobody left to soak, at which point, the class war targets move down a notch on the food chain.

As for collective bargaining for public employees, it's a bad idea for any number of reasons, not the least of which is that politicians use taxpayer money to fund the unions which in turn support the pols when they vote for huge benefits.

Combine these things and you have an unsustainable system which will tear itself apart.

Ed said...

Vince - I think wealth tends to increase among the riches for several reasons. After reaching a point, they have more time to find creative ways to invest their money which they receive capital gains from at a 15% tax rate. Their income switches from earned income to capital gains. I'm not sure I would liken that to amoral but rather they tend to be smarter with their money. Also the rich tend to be business owners and competitive when it comes to most things in life, including making money.

R. Sherman - If 1% pay 95% of all taxes, then the saying that I used is woefully outdated but certainly helps drive home the point I was trying to make.

Vince said...

By amoral, I mean that it's neither a good nor bad, it just is.
If you take wealth flow as a river. It has many small sources and in good economies will strengthen quickly while springing many more sources. However if you draw from near the source you will dry it easily. So the deeper the better for the economy as a whole.
All the same though, if one is paying more than 20% of income in direct tax you need to not only fire your accountant but shooting might be on the cards.
And Randall, pull the other leg it's got bells on it. 95% by 1% my eye.

sage said...

But the tax code isn't that simple... This is assuming that everyone is paid and taxed equally. There are creative ways for those with more to pay less. You're also right, if you squeeze too hard, people will go elsewhere, but where would they go that is stable and secure and has a lower tax rate? Warren Buffett has, many times, suggested that he pays too little tax.

Ed said...

Sage - I'm serious when I ask this but name one creative way that someone in a higher tax bracket can do to reduce the percentage of tax they pay to less than someone in a lower tax bracket? The only things that I can see are ways to reduce your income to a lower tax bracket but then you are making the same as everyone in that tax bracket and being taxed the same. The only other way is to not earn a taxable income and make all your money through capital gains which does reduce your taxes because you only pay 15% on capital gains. But anyone in any tax bracket has that ability. Finally, all tax breaks such as the Earned Income Credit, child deductions, etc, are either the same across all tax brackets or in most cases phased out the more money you make. I have done extensive research on this subject and I can't find one that isn't available to everyone or the rich get less of a deal than the poor.

R. Sherman said...

Back in my law school days, I took every tax class known to man. The only way to reduce taxes is to have (deductible) expenses against income, reduce income or give to charity. Most what people think are "tax breaks" are credits businesses get for creating jobs or investing capital in their business.

sage said...

This is an article about Buffet's comments:

Capital gains are the main way to avoid paying higher taxes. The more wealth you have, the easier it is to invest in ways that both create more wealth and reduce one's tax liability. If one makes $10k a year, they will not be able to even put $s into a IRA or a 401 which is the best tax break average folks get.

Also, for those making more than $106k a year, do not have to pay social security on the higher amount. It's not really right to call social security an "entitlement" when most of us pay into all our lives.

However, I don't want to defend our system, because I think it could be a lot better and fairer.

Ed said...

Sage - Thank you. I was not aware of the social security capping out so there is at least one true tax break for the rich. As for the capital gains, I am aware of that one and hope to someday take advantage of it due to my intensive investment plan but like I mentioned earlier, it is available to anyone though everyone may not take advantage of it.

The Field of Gold said...

Ha Ha. My radio just said. "Revolution is sweeping across the world. Tunisia, Egypt, Libya --- and now --- Wisconsin."

PhilippinesPhil said...

Ed, I'm impressed with all the thought that went in to this post and in all the comments, you have some pretty smart readers. What you guys are ignoring is that the Wisconsin public employees raising all this stink could not care less about balancing budgets and what is fair. They want what they want, so there! They remind me of small kids throwing temper tantrums. Did you read Michael Moore's speech to these Wisconsin demonstrators where he now famously claims "America (Wisconsin) isn't broke!..." His strategy: pay for all these bennies and entitlements by taking even more from the "uber rich," not including him of course.