Has anyone (everyone?) seen the endlessly forwarded e mail “A Simple Message in Economics”? I’m trying to find out if it has been bebunked yet. Here’s a link, in case you have not seen it:
It was pretty easy to determine that the author attribution is incorrect. The second sentence on the Web page Dr. David R. Kamerschen at the University of Georgia reads: “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.”
What I have not found out yet is if the information is even close to being correct. Of course, I suspect it is not. For example, do the tax rates given in this parable accurate?
The numbers are roughly correct, for one particular tax: the federal individual income tax. If you were to include other taxes, such as payroll taxes, state income and sales taxes, and local property taxes, then results would be less skewed.
In addition, the amounts paid are not tax rates, they are the proportion of the total amount of the federal income tax paid by each person.
The story ignores Medicare, Social Security, and importantly, passive income (capital gains).
The richest people get a lot of their income through dividends, stock sales, etc., that is taxed at a much lower rate than wage income.
It also ignores that all those men ate at the restaurant during the Clinton years, when the richest guy was paying even more, and didn’t leave the country.
It also ignores that the meal truly costs $100, and that the restaurant owner is going to charge the men’s kids the part that the men aren’t paying.
Oversimplification is a fun way to make a fallacious point.
In 2001, 50% of the federal income tax was paid by the top 4% of filers (people with AGI’s of $140k+). 83% of the federal income tax was paid by the top 25% of filers (people with AGI’s of $56k+). This is a combination of the top filers earning more, as well as the fact that they are taxed at a higher rate.
It’s important to note that the IRS reports only on AGI – it’s quite possible that people make millions of dollars, use tax shelters to lower their AGI to a few hundred thousand, and pay very little tax on the total amount they own – but usually the problem there is a compliance issue (people illegally evading taxes) and complaints should be taken to the IRS, not to lawmakers.
Cecil addresses the issue of a flat tax rate (every income bracket paying the same tax percentage) in a 1996 column.
Numbers notwithstanding, as a student of economics, I find the suggestion that this is a lesson in economics rather offensive. It is a lesson in ignorance at best. First of all, if this lesson were valuable, there would be wealthy leaving the States in droves. Yet they seem to stay here.
Second of all, the author is confusing dollars paid with welfare sacrificed. There is no reason to suspect that one’s satisfaction (utility) is proportional to income. Indeed, the idea that an additional dollar raises a wealthy person’s well-being by the same amount as it would for a bum is difficult to fathom. Even a so-called flat tax assumes that additional dollars are less valuable as one becomes wealthier. Even more worth noting is that, as noted by H. Peyton Young in Equity: In Theory and Practice, empirical studies have shown utility to be concave enough that the increasing marginal tax rates in the States actually provide an equal burden; i.e. the restaurant patrons are suffering similar burdens even though one pays the majority of the bill. The same book also notes that because of other taxes, the actual taxes paid are closer to being equal in terms of percentages paid (as mentioned above), and therefore the wealthy do indeed bear a smaller burden in terms of well-being sacrificed.
If you are interested in how tax policies affect the wealthy, then you might peruse Does Atlas Shrug? edited by Joel Slemrod. Also, Young’s chapter on taxes is an outstanding introduction to the issue of tax burden and fairness. I highly recommend it.
Oh, FTR, you can go to Snopes.com for junk like that. Most “factual” chain mailings are addressed by the good people at Snopes. Well categorized with a good search engine.