The economy and tax cuts simplified!
The media often decries that tax cuts for the rich are unfair, and that the wealthy are greedy individuals who don’t care about poor people and don’t pay their fair share in taxes. We saw a lot of this in recent years from the Occupy Wall Street group as they tried to demonize the top 1%. The sad fact is that the majority of individuals in the USA do not understand the economy, personal finance, taxes, investments, or the stock market in general.
These are three undeniable facts:
- Wealthy people create the most jobs and pay the most taxes.
- Poor people are poor because they don’t yet understand how to become rich.
- Investing in the stock market has resulted in the largest creation of wealth in human history.
“(It’s) the economy, stupid” – James Carville
Let’s start off by differentiating between the economy and the stock market. They are NOT the same thing. February 5th 2018 saw the largest single drop in the history of the Dow Jones, 1175 points. And the two week period from the end of January to mid February amounted to a market correction, which is to say, a 10 percent drop. You did not see 10% of the business in America hang a ‘closed forever’ sign on their doors, nor did you see them fire 10% of their employees, or find the shelves stocked with 10% less goods. This is because the economy is just as strong today as it was before the market dropped. The economy involves the sum of all the goods and services produced in this country every day. The stock market is something very different and doesn’t have anything to do with the economy at all. The market reflects speculations by investors on the potential values of various companies based on imagined future profits. Nothing is produced on Wall Street except wealth. When you buy a stock, you are actually really just loaning that company money in the hopes of a future return on your investment. The stock exchange just facilitates and records that transfer of funds. The influx of currency gives the company capital which it can use to expand and grow the goods and services it produces. Hopefully. As the famous investing disclaimer goes “past performance does not guarantee future earnings”. This is why tax cuts for business and the wealthy can cause the market to fluctuate. The perceptions of investors change, and the market reflects that change.
A median is the exact mid-point. In 2016 the real median household income was $59,039. That said, half of the households in the USA earned more, and half earned less. The same can be said of tax payers. About 50% of the people in the country pay ZERO in federal taxes, while the wealthiest 1% in the country account for a staggering 35% of all taxes collected. When you expand this group to the top 10% of wage earners, the taxes collected grows to 68%. Is it fair when a millionaire gets a larger tax cut? Absolutely! If taxes were ‘fair’ we’d all pay the exact same percentage regardless of our level of income.
There’s no such thing as a free lunch!
On October 30th 2017, White House press secretary Sarah Huckabee Sanders kicked off a press briefing by reading an anecdote about reporters and a bar tab to try to explain who would benefit from the proposed Republican tax reform framework. It was adapted from a piece that had been floating around the internet since the early 2000’s, Here is the original:
Suppose that every day, ten men go out for lunch 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 ate lunch in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.
“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily lunch by $20.00.” So lunch for the ten men would 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 eat for free. But what about the other six men? 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 eat his lunch.
So the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.
And so the fifth man, like the first four, now paid nothing (100% off).
The sixth now paid $2 instead of $3 (33% off).
The seventh now paid $5 instead of $7 (28% off).
The eighth now paid $9 instead of $12 (25% off).
The ninth now paid $14 instead of $18 (22% off).
The tenth now paid $49 instead of $59 (16% off).
Each of the six was better off than before. And the first four continued to eat lunch for free. But, once outside the bar, the men began to compare the amount they got off.
The sixth man said, “I only got $1 off out of the $20 while the tenth man got $10 off!”
“Yeah, that’s right,” exclaimed the fifth man. “I only got $1 off, too. It’s unfair that he got ten times more benefit than me!”
“That’s true!” shouted the seventh man. “Why should he get $10 off, when I got only $2? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”
The nine men surrounded the tenth and told him they were angry that he got so much off while they each got very little.
The next day the tenth man didn’t show up for lunch, so the nine sat down and had their lunches without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money amongst all of them for even half of the bill!
And that is how our tax system works. The people who already pay the highest taxes will naturally get the largest benefit from a tax reduction. Also, all of the taxes collected annually do not cover all of the spending by the Government the short fall of which is covered by borrowing money from foreign countries. Each year this deficit and the interest on the foreign loans adds to the growing national debt. You can see this debt growing in real time at usdebtclock.org . Currently we have a national debt of $20,633,000,000,000. This amounts to $63,000 per citizen OR $170,000 per tax payer ! The government needs to shrink the national debt and the only way to do that is by the elimination of all non-essential spending. We need to have everyone pulling their own weight. We can’t have half the country working and paying taxes for the other half of the country to sit home and not work. Government welfare programs must end. We simply cannot keep spending more money than we take in. You can spend your way into the poor house, but you’ll never spend your way into prosperity.
Now when you’re earning less than $60,000 a year, a million dollars is a lot of money. Even if you earned $250,000 a year, a million dollars is still a lot of money. But when we talk about the US economy, the budget, and tax cuts, were are discussing billions (a thousand-million) and trillions (a million-million) and these numbers are larger than the average person can comprehend. Let’s ignore the smaller numbers and shoot for the moon by explaining the size of a trillion.
A single one dollar bill measures 6.14 inches. If you laid a trillion of them end to end, it measures 96,906,656 miles. This would exceed the distance from the earth to the sun. Even if you just stacked them one on top of the other, the distance would be 67,866 miles. This would reach more than one fourth the way from the earth to the moon. Mind blowing huh?
One of my favorite examples of explaining the US budget, taxes, and those ‘HUGE’ multi-billion dollar budget cuts is to shrink the example down to a household budget. You remove the 8 zeroes. I’m using numbers from the recent 2018 US budget and the current national debt .
- United States Tax revenue : $3,654,000,000,000
- Fed budget $4,094,000,000,000
- New debt $440,000,000,000
- National debt $20,633,000,000,000
- Recent budget cuts which some politicians are proud about $ 54,000,000,000
Now, remove 8 zeroes and pretend it’s a household budget.
- Annual income $36,540
- Annual spending $40,940
- New debt on the credit card $4,400
- Outstanding credit card debt $206,330
- Recent budget cut $ 540
Now look at those ‘household budget’ figures. Knowing that you were in debt about 564% of your annual income, would you continue to spend 112% of what you earn? Would you decrease that by less than 1.5% and call that an accomplishment? You’d have to be way beyond crazy to think that was a good idea. Hopefully you now understand why we need to end the welfare state and stop demonizing the rich. As always I wish you happiness and success!