San Diego Housing Bubble News and Analysis

Sure. Except for one problem: the facts.

Effective tax rates (meaning actual taxes paid) for the richest Americans AND effective tax rates for the companies they manage are some of the LOWEST tax rates ever paid by those groups in the entire history of our nation. Even the Wall Street Journal has written articles acknowledging in particular how low corporate tax rates are.

Those are the facts.

Buffet (an honest and honorable man) was interviewed by Charlie Rose this week. Buffet stated the above fact, and even though it was to his DISadvantage to acknowlege it on national TV, he had the courage to say (paraphrasing),

"I pay and my company pays a much lower tax rate than my secretary, or the average lower middle class American. Something is deeply wrong with THAT."

This is one of many reasons Buffet is so well respected. He has the guts and integrity to admit on national TV that rich Americans and our corporations are paying taxes at rates that are TOO LOW.

In order for this to be accurate; there needs to be an 11th man (representing the wealthiest that don't pay taxes) that the other ten pay to drink the best beer.

Gosh oh gee. How do I debate such a straight forward and simple explanation of our tax system?
Let me try.

A "real" economist would have two problems with this "example":
1. It uses luxury as its model. A simple understanding of game theory shows that at the end of
the story, if the 10th man decides not to buy, then he has no leverage. No one "needs" beer. Our
government doesn't apportion luxuries.

2. There is no baseline. The assumption is that if you can't afford it, don't drink. When in reality,
what most of us are doing is working to pay for food, clothing, shelter, education, and healthcare.
THAT is the baseline. Anything made above the price of these necessities could be subject
to the "beer" argument, but the result would end up with pretty much everyone paying as shown.

So it's ridiculous to use beer as the example. Why not use 60" plasma TVs or diamonds?
None of these represent the economic situation that most of us find ourselves in. Since the example
uses a luxury (beer) as its foundation, let's rewrite the story using a necessity: Oxygen.

HERE IS THE UPDATE TO THE STORY
Suppose that every day, ten men go out for oxygen and the bill for all ten
comes to $100. 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 breathe each day and seem quite happy with the
arrangement, until one day, the richest man throws them a curve.

"I'm tired of paying the most when you all use the same amount of oxygen.
I'm not going to pay for you to get oxygen anymore. Go buy your own air."

the 1st and 2nd men (poorest) can't afford oxygen and die within minutes.

The 3rd poor man gets his wages reduced by his boss (the seventh man who needs to pay more now)
and can no longer afford oxygen either. He dies within days.

The 4th poor man, pays for oxygen and continues to breathe. How? He loves his wife and kids
and so to continue to allow them to breathe, he was driven to steal the rich man's car to pay for oxygen
for his family. Crime increases, not because men want "beer" and bling, but because they will do
anything to provide for their families. He gets caught and sent to prison where he earns no money.
His disabled wife and small children all die now that they have no provider of oxygen.

The 5th & 6th men make their living selling products (like food) and services to the first 4 men.
Having more than half of their customers die, they can no longer afford to stay in business.
They both close shop and die within weeks.

The 7th & 8th men own or work for companies that sell products and services to the 9th & 10th man.
Unfortunately, the workers they rely on to plant and harvest the crops, manufacture goods, and deliver
the services have all died. Within months, the 7th and 8th men die.

The 9th man has enough money to buy oxygen for a year. Unfortunately, the guy that refills oxygen bottles was man
number 1. The guy that maintains the regulators and oxygen safety equipment was man number 2. The owner of the trucking
company that delivers the oxygen was man number 7. Man number 9 dies in 4 months when the supply of safe, available oxygen disappears.

Now we come to good, ol' man number 10. The guy that wants to stop paying because he is blind to the value others bring to him and his lifestyle.
Man number 10 has stocked away 5 years worth of oxygen. He'll survive...at least for awhile. As long as
he can build his own roads, make his own electricity, maintain his own equipment, grow his own food, provide his own healthcare,
clean his own air & water, and protect himself from fire, flood, hurricane, and the occasional attack from
anyone else who might have survived and wants to take HIS oxygen.

And that, ladies and gentlemen, journalists and college professors, is how our tax system would
work if we let the short-sighted run our economy. The people who pay the highest taxes need to understand
that they truly get the most benefit when the people who supply, buy, and work for them can afford the necessities of life.
Bitch too much, attack the middle class and poor for not paying enough, and they just may
stop producing, showing up, or DIE.

David Stuck
Student of Life and Economics
For those who were naive enough to except the "beer" analogy, think about
where YOUR money goes and what would happen to you. (hint: You aren't the 10th man)

EXCELLENT response, David!!!! You nailed it!

Not this one again. Didnt we debate the value of this EXACT same example not like 6 months agao? Or am I just clairvoint and saw this one comeing a few months ago.

I enjoyed the post and the ripost in the form of a story. Very helpful. Thanks to you both.

One argument is that the wealthy 10th man is going to stop playing the game if he's taxed too much. The other argument is that no one will stop playing the game because no one really has a choice, an alternative. I think the truth is somewhere in between, because of widespread tax evasion amongst people who work for themselves. If tax rates are low enough, they declare more of their income. If tax rates are high, they hide more income. They are a politically powerful group, so the tax evasion is widely tolerated.

Always be checking your facts.....

Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics." Additionally, he does NOT know who wrote it.

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

Imagine that there are only ten people in the world. There's also a brewery (with its own bar).

Seven people work at the brewery and earn $10/month. They don't pay any taxes.

One guy is a government-employed doctor, he earns $15/month.

One guy works as a manager of the brewery and earns $25/month, and pays $5/month in taxes.

The remaining guy owns the brewery, he does not work at all, he makes $100/month in capital gains and pays $10/month in taxes.

Everyone gets free health care, paid for by the government. There's also a plan that promises disability insurance to anyone who can't work.

One day the guy #10 realizes that he pays 2/3rds of all taxes, but his healthcare isn't any better than that of #1...#8. He decides that it's unjust, and he starts a party that would defend his interests. He invites the manager as his co-founder. He attracts four workers by promising them that the party will ban abortion, enforce prayer in schools, and institute death penalty for homosexuals.

Together they get the majority in the Senate, privatize healthcare, cut taxes, and abolish disability insurance. Guys #9 and #10 are way richer than #1..#8 and they can afford to pay more for healthcare. The doctor begins working for them full-time.

#1 to #7 notice that the beer becomes more expensive, because #8, #9, and #10 have more money left in their pockets, and #1 to #7 have to buy expensive health insurance just to get some attention from the doctor. So #8 to #10 drink more beer and #1 to #7 drink less.

After a few months, #1 breaks his leg, he becomes disabled and soon dies.

Finally workers decide that they had enough. They beat up #10 and kick him out of the country.

Why do people hate other people with more money? I just don't get it. Not ever rich person is a crook, and some (maybe just some) worked a tee-bit harder than the rest of us.

If you care about money enough, go figure a way to make more. If you don't care, than it shouldn't matter what someone how has more does with it.

I think I'm going to join UAW.

Socialism. Sigh.