COED Alumni Report: Tax Reform

Being the college graduate of the group, I think it might be time to get a little serious about the upcoming elections. There are a plethora of issues at stake, and while the media like to pose it as race/gender war, I tend to think the major issues teeter on fiscal responsibility and economic stability – I know, I am a buzzkill…sorry!

This weeks topic: the taxes. The tax code right now sucks. WTF we do about it is the major question. Of course, health reform is a large issue, but as the COED office’s grandfather (@ 25), as long as I can remember there has always been a need for health reform – but it never happens. As long as the economy is steady, it makes a great election talking point but then dies off. Yeah Clinton tried it, but it got pissed all over like a Girl Scout at R-Kelly’s house.

For those of you failing Econ 101, let me re-use a very famous explanation:

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 guy 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!

Ladies and gentlemen, that is our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction, absolutely true. But to propose a high end tax increase (attack the wealthy), and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier. That is the underestimated reality. While the poor may have little recourse to “fight” the system, like it or not, they use the system the most (this is not a knock but a reality). They need the system because they don’t have enough income to support themselves.

The rich, however, will be forced to go to great lengths to try and beat the system. Believe me, in my 4 years since graduation, I have learned that the rich are smarter than the poor and will find a way to slowly (or quickly) shift taxable earnings out of the US. What’s worse is that with the fluidity of the current global financial market, if I can get an overseas bank account for my $500 – rich people can move their millions much easier.

In short, we need to start looking at tax reform as a major political issue – not just for our parents – but for our future. A little less MySpace, and a little more Wall Street Journal could do us all a little good.

(For those pissy I didn’t come up with an “answer”: if I was that smart, I would have a real job and probably running for president.)