Sunday, April 01, 2007

A Tax Cut Parable

I like the parable that has been discussed by Greg Mankiw, PGL, and Mark Thoma in recent days. I think it's actually a great way to take a look at the Bush tax cuts, and their effect on people of different incomes.

Based on the actual distribution of federal income taxes in the US, and the effects of the Bush tax cuts (estimated by the CBPP, available here), I've redone the numbers in the parable that Greg first related to reflect reality in the US. The problem, as PGL points out, is that in actuality the Bush tax cuts didn't lower the bill that the people in the bar must pay down to $80; it was effectively just an agreement to pay $80 of the $100 tab now, and pay the rest later (read Greg's post for the original parable in its entirety).

So here's how it really happens in the bar when the Bush administration "cuts" taxes:
The first and second men (the poorest) used to pay $0.20. Now they pay only $0.15 (a savings of $0.05, or 23%). They must then pay an addtional $0.16 somewhere down the road.

The third and fourth men (the next poorest) used to pay $1.25. Now they pay only $0.90 each (an immediate savings of $0.35, or 28%), but must pay an additional $0.46 each later.

The fifth and sixth men used to pay $4.05 each. Now they pay only $3.25 each (an immediate savings of $0.80, or 20%), but must pay an additional $1.00 each later.

The seventh and eighth men used to pay $8.70 each. Now they pay only $7.10 each (an immediate savings of $1.60, or 18%), but must pay an additional $1.90 each later.

The ninth man (the second-richest) used to pay $15.60. Now he pays only $12.45 (an immediate savings of $3.15, or 20%), but must pay an additional $3.10 later.

Finally, the tenth man (the richest, who had an income about ten times that of the fifth man, and five times that of the seventh man) used to pay $56.00. Now he pays only $45.00 (an immediate savings of $11.00, or 20%), but must pay an additional $9.75 later.
Not a bad deal - as long as you're the richest man there.

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