by agiraffedies September 16, 2009 9:42 AM EDT
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 beers 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.
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 very 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 DO get the most benefit from a tax reduction. They also PAY more than the rest. 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.
This is how our tax system works. But, as the state of Maryland learned the hard way, if you tax the wealthy beyond what THEY deem to be fair...they'll just take their money and move somewhere else.
Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."
One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.
A year ago, Maryland created a higher tax bracket for millionaires intended to help balance the state's finances and make the tax code more progressive. How is it working for them? In the last year the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by 1/3 to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million. Increasing taxes on the rich has failed because the rich are mobile and can choose where they live. I am sure the states with lower tax rates, where they moved, appreciate the increased revenue.
But perhaps an even better example is California. They've increased their taxes during a recession, and their growth rate has slowed from 3.8% to a net decrease of 1.2%. It's the first time in California history that more businesses and people are LEAVING the state than are arriving.
This is what we, as a nation face, if we continue to raise taxes on the wealthy. I firmly believe that what we really need is what Steve Forbes called for 9 years ago. A "flat" income tax. The 1st $36,000.00 is not taxed. No one making less than the poverty level (depending upon number of dependents) pays no taxes. Everyone else pays 20% of their income as a federal tax. No tax on Social Security, no tax on retirement/pensions (you've already paid taxes on it while you were saving for it), and no "death" taxes. There would be no reason for the IRS to exist as you'd pay the tax through payroll deductions, hence your tax return would literally be no larger than a post card: amount earned, taxes paid, balance due/credit earned. Simple enough?
Since 1970, politicians have increased spending seven fold, yet net family income has declined. Maybe the time has come to explain to our "political elite" that we can no longer afford them. Maybe it's time to clean house, impose term limits, spending caps and try and pay down the national debt, while eliminated deficit spending.