Monday, September 19, 2011

Taxation, Tax Refunds, And Free Market Economics Made Simple

I would like to think that most people would never tolerate our tax system if they really understood it. But we continue to engaged in dangerous liberal ideologies and class warfare over taxes and tax cuts.  Maybe those who pay nothing and/or receive public assistance should not be allowed to vote.

A few years ago Neil Cavuto featured a letter from an unnamed viewer who attempted to put the whole class argument on tax cuts in perspective. I have taken some editorial liberty with the writer’s basic premise and developed it into this parable that could be helpful in teaching some basic fundamentals of economics to young people. Even children can understand this stuff.  Unfortunately, this kind of thinking will NEVER emanate from the failed, liberal public indoctrination system.  Nevertheless I offer this for the edification of my own grandchildren.

Ten students formed a social club to go off campus one day each week for lunch at a local restaurant. (Just because they could, the administration decided to regulate and control the group's activities.) So that they would all know how to plan for the weekly cost of their activity the school administration arranged, with the restaurant manager, a total, fixed price of $100.00 per week for their meals including beverages, tax, and tip.  That was exactly $10.00 per student per week regardless of how much each student ate. That was the "fair" thing to do and besides, it made paying the bill convenient and easy so they all accepted the flat rate.

They all agreed that they would earn their own money to pay their fair share. Some found minimum wage jobs flipping hamburgers or washing cars. Others went to work at higher paying jobs as grocery clerks and restaurant servers. One of the students, a resourceful, entrepreneurial type, worked hard and invested quite a large sum of his own savings, to start his own lawn care business and he actually provided jobs for two of the other students in his club.

The club organized itself and began to meet each week and all the members enjoyed their social gatherings and gladly pitched in for their equal shares. The school administration collected the money and paid the weekly tab.

Now, lots of people would agree that that is the fair way to divide the bill and most people would be satisfied with that arrangement. Right? Well maybe not!

One of the teachers (no doubt a tenured union worker) didn’t “feel good” about their agreed upon arrangement.  She noticed that, while some of the students could easily afford $10.00 for the meal, there were those who were "less fortunate" and didn’t earn quite as much as others.  She thought it "unfair" that they had to work a little longer or a little harder for their fare.  And then there was that one enterprising student who had an unfair advantage; he earned a lot more than all the others.

So, with "good intentions" and their "hearts in the right places," putting their feelings ahead of good sense, the administration stepped in to devise a more equitable system for the students to pay the bill (the same way we pay our taxes):

The four unfortunate, hard-working students who performed work that most Americans won't do, earned the least so they would pay nothing. The fifth student would pay only $1.00, the sixth, $3.00, the seventh, $7.00, the eight, $12.00 and the ninth $18.00. That one lucky kid who got all the unfair breaks in life’s lottery would pay $59.00.

O.K., it wasn’t right and, deep in their hearts they all knew it, but everybody went along with it because, after all, nobody wants to be perceived as being uncompassionate and insensitive to those less fortunate.

So they continued to meet each week and enjoyed their food and fellowship and everything was fine until, one day, the restaurant owner goofed it all up. “Since your students are all such fine young people and we really appreciate their regular business,” he said to the administrator, “I’m going to give you a 20% discount. From now on, lunch for ten students will cost only $80.00.”

Now the administration had the task of dividing the $20.00 savings so that everyone would get his fair share of the cut. They (the pin-headed administration) reasoned decided that the four poor students who only worked at minimum wage jobs should remain unaffected; they would still eat for free. So when they calculated how much of the $20.00 savings the remaining six students would receive, they discovered that it came to $3.33 each. But then they realized that if they subtracted that amount from everybody’s share, the fifth and the sixth students would actually get a refund larger than the amounts they paid for their meals. It was obvious that a fair distribution of the refund was going to be difficult to figure out. Then the Administrator got a brilliant idea suffered brain flatulence.  He decided to simply withhold the refund, continue to charge the members the same rates, and divert the savings into the school’s general fund so they could spend use it on other administrative interests. When the club members heard about it, they protested loudly and demanded their money back.

Some of the club members suggested that it might be fairer to distribute the savings in proportion to what each student paid. The majority agreed that the plan sounded reasonable so the administration worked out a new refund payment schedule.

With the new plan, the fifth student, who was paying $1.00, would now also eat for free. The sixth student would pay $2.00 instead of $3.00. The seventh, who paid $7.00 would now pay $5.00. The eighth pitched in $9.00 rather than $12.00. And the ninth student’s bill was reduced from $18.00 to $12.00. That no good rich kid realized a whopping $7.00 savings. He now paid $52.00 instead of $59.00.

After lunch the kids all got together and began to compare their savings. “I only got a dollar out of the $20.00,” declared the sixth student, “and that rich kid got $7.00.”

“Yeah, that’s right,” said the fifth student (who ate free), “I only saved a dollar! It’s not fair that the person who earns the most money gets the biggest refund.”

“That’s true,” shouted the seventh student. “Why should that greedy guy who owns a very successful business get $7.00 when all I got was $2.00? Those with all the money get all the breaks!”

Then the first four poor students jumped in. “We didn’t get anything at all and we’re the ones who need it the most. This system exploits the poor,” they shouted.

Tempers began to flare and pretty soon the nine students decided that the rich kid was greedy and evil and was not paying his fair share so they surrounded him and beat him up. They took out his wallet, removed $7.00 and divided it among the seven students who earned the least. That’s right! Six of them actually got paid to eat lunch at the expense of others.

The young entrepreneur was so badly beaten that he had to take some time off from his business. His loss of income forced him to lay off his two employees.  The next Friday he didn’t show up for lunch. That was O.K. with the others; they were mad at him anyway and so they sat down to enjoy their meal without him. But when it came time to pay the bill, they suddenly discovered that they were $52.00 short.

And that is how the tax system works. The people who pay the most in taxes are the ones who create the jobs and the wealth for everyone else and so it stands to reason that they would get the most benefit from a tax reduction.  If you tax them too much and attack them for being wealthy, they just might stop doing business, eliminate jobs and not show up to pay for your free lunch anymore.  There are plenty of other good restaurants in town and frankly, that rich kid can buy a pretty good lunch for $10.00.

This story puts taxation and the tax refund debate in terms that even young school kids should understand. In our system, some people can afford to pay and they do pay and pay and pay a lot. Others, who can’t afford to pay, don’t pay anything at all.  So when a little tax cut comes along, those who pay the most get the biggest breaks but they still pay the largest share of the bill.

Some people go through their entire lives with the expectation that they should get something for nothing and they are happy to extort more from those who pay the most.  But what really galls me is that there are too many who propose that, when a tax refund comes along, we should divide the savings among those who contribute nothing in the first place and that those who have something should get nothing.

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