my former economics professor richard wolfe is joining us professor emeritus
at the university of massachusetts and also teaching at the new school
law in new york city great to see you again
and providing so this is
listing floating around the internet people he mailed it to me
need is a video of
bull way of understanding te
in the u_s_ and its called bar stool economics now i did a pretty lousy job
of explaining why it's simply not valid a couple of weeks ago our audience was
nice enough that half actually said it was good but i wanted to bring in the
end of the real experts to analyze this thing with me you had a chance that
review this thing i'm guessing yes yet so the idea
that's is like these
you know when it says that if ten guys went in to drink one beer each that
people who make the least would get the beer for free in the guy who makes the
most
this would pay the most
let's start at the beginning
just fundamentally not a good representation of the tax system in the
u_s_
well that company level but kind of wonder where the start that was my
problem exactly and
and you know in attempt to be fair
that's the genius of a good simplification that it gets away from
the details
and leaves whoever you're telling it to
with a sense that maybe they regret the complexity in this little simplified
story in
uh... the great thing
as you can explain that in thirty seconds and it was going to take me
leads to debunk
puppet
right you know if i get you have to take your hat off to the cleverness of it
but one for adverse someone once said the devil is in the details once you
actually unpacked
the story
seem to get very much more complicated and the outcome is pretty much the
opposite of what said
basically uh...
the best way to get at this is historically
what the video talks about basically is the personal income-tax and how it works
in terms of how it impacts
uh... different parts of the community
in terms of raising the money that that the government needs to provide services
so what do you teach anyone about the tax system
you always have to look at two sites one
who is paying it
and how much
and on the other hand who's benefiting from it
and how much
in order to get a sense of it
this video
cuts all that process short it makes a very
uh... factually incorrect assumption
because i have the or all the fellows at the park
getting the drink they needed walk and fear
everybody rich and poor alike
get the same services from the government
that their taxes paid for
but that i've never been true that is not true now
and in fact everybody listening or watching what we're doing today knows
that they know
that in the neighborhoods where rich people live everything is cleaner
everything is my serve the plant things are better
everyone knows for example that
if you go to the most expensive colleges in the united states
of harvard yale plated like that
and you ever study them you'll discover that they pay no taxes they are given
empty credible allowance
being billion dollar corporations
that they pay no taxes are all of the income they earn
tuition payments the stock and bond income they earned and so on
and that allowed them to make the education the four-year education of
uh...
young people rich enough to go to harvard and yale much much cheaper than
it would otherwise be
if those people had to pay
for a university that internet to pay taxes
so if you get completely different
payout
from government services
if you are poor or middle
then what you get from the government and services tax exemptions and so on
if you are of rich so there's two analogies here to the bar stool
economics number one is that the analogy that everybody is
on but number two the fact that everybody
even drinking at the
are absolutely wrong
which everybody knows everybody know that uh...
para if you have a certain kind of money you're much more likely to be found
inexpensive barnum length of allowed
except for except it
than if you are your average person go into a neighborhood bar except receptors
all beginning here it is
to begin which is what this story does
by positioning everyone equal
which is
just plain
the second way to get at
the confusion here
is just to remember the history of the income tax credit
has moved the whole thing
income-tax united states was passed in nineteen ten
so would literally a hundred year old system
when it was passed
uh... there was great anxiety among the maps of people that they would now
suffer a new tax from the government
so when it went through congress and was passed by the two houses and signed by
the president
but promise was made
that give tax would never change in our let me underscore this
from its initial intent
which was to be and i quote
attacks on the rich
it was to be
a pack
that went after the top one px took four percent of the american people the
richest
because and this was the argument that was made they were the most able to pay
and they should be called upon to contribute to the commonwealth being
according to their capacity
in the original legislative that that that they thought they had all the work
and probably get that with the whole concept right
and it whatever
and it worked levied at first on the rich
and exclusively on them at the best majority ninety five or more percent of
the people
had no income tax to pay
what you have in the left in the last hundred years
to make a long story short
if they first thing in the political effort by both at the top
spread the income tax
ortho of their exclusive shoulders
and onto everybody else's
and this for two reasons
but more of the average person
up and down the income distribution
had to pay income tax
the left
of the special pressure would come on the super-rich
to pay that money
but even more important
but for the tax was spread the rich understood
but more the merrier but people would be calm
they are allies in arguing against an income tax
or at least in arguing to keep it down
so what we have to the current income tax
that has achieved mulch
all of these designers of the super-rich
they now don't pay orbit
they don't even pay
ob anything like all of its the best bulk of the taxes are paid
by up and down the income distribution really
all with the people at the bottom
are exempted from the income tax virtually everybody else
have to pay it
so if you look at the sweep of history
they have done really extraordinarily well
three-c_
va second part of this bar stool economics video which
there is a tax cut givin
said was a twenty dollar discount on the total of a hundred dollars paid for ten
beers well
majority of the dollars goes to the richest person proportionately
it's actually a very small piece which is a similar argument that we hear when
we think about the bush tax cuts address that part for us ok where you have to
understand how the income tax it works
everybody paid this same rate
on the same portion of their income
this is allot of folks confined it's difficult to understand let me explain
yes
everybody pays their fame rape on the first ten thousand dollars a year of
income that yet
everybody paid the high cure rate on the next ten thousand and so on pat's right
so when you hear that the people at the top have a marginal tax rate these days
of thirty five percent
that does not mean
that they pay thirty five percent of the whole amount they only pay thirty five
percent
of the highest
now keep could ofcourse
have been a a systems in which every ten thousand you earn more every twenty
thousand
the rate goes higher
had that been done
then people at the highest rate
would have been paying
seventy aideed ninety percent
outlet top
of what they got the last ten or twenty thousand
of their income
and one that way in the united states
back in the middle of the twentieth century packs that's right for example
that were period of years in our country
whether people at the highest rate
paid ninety-one that's right you heard me league ninety one percent
of the top these were the richest americans earning
millions of dollars a year
and while they paid the famed raid on the first fifty thousand that everybody
else paid on their first fifty thousand
they didn't have a higher rates all the way to the top
all of that after world war two was basically pared down
with the biggest cot for the wealthy coming from ronald reagan
in nineteen eighty
when he cut the top rate from seventy one percent
to thirty-five percent which was eight
saddlery
caught in the income tax for the rich
and was not paralleled the bite everything like such a cot
for the middle or the poor
so when you actually
speaking of the income taxes system
you'll know that the whole point update initially was
to tax the rich
that's what the legislation that was the debate that was a decision made
by the congress and the president at that time
what had happened ever since
and what did video is part of the effort to continue
if tip basically kept the rich out of the position
of having to pay more then other people on the ground that they have a greater
capacity
to pay
but there is another fought in this video among its many that also needs
uh... to be
direct
what the comparison here it is is with the rate of tax that is a literal
scheduled at the internal revenue service puts out
as to how much you have to pay
on each additional ten twenty thousand dollars of income per year sexual burner
but if you know anything about how our taxes but works
you will know
baby great
is what very few wealthy people pay
because they have pool right
that'll crucial that the mass of people to or not at one
they have the right
to take a lot of cold deductions and exemptions of all sorts
for example
if you maintain a magnificent ranch
where you goals are in the winter too speedy and in the summer to relax
and if you have twelve
head of cattle on the air you could call this in in our country
of farm gentleman's farm state research farm what your testing new clips of
peace
who look at
and then you can pick doctor all of this at the next
of your research or of your peace program of europe
farming activities
said that this goes to what warren buffett said that he actually pays a lot
of small portion of his income taxes
secretary to taxes that's why i do that because
he had the right to deliver that far
on huge set of exemptions
and let me make clear here
vote exemptions are appealable of course on paper to middle income and poor
people except middle-income in poor people don't have the money to do with
the kinds of things do you think sections
give you what great for
so they are
technically available to the mass of people but in reality
completely unavailable
six and if i can example is
uh... and and really anyone who looks at this video and understand everything
will be through with it
is that there are is an enormous profession
of people in the united states will go by the name
tax lawyer tax accountant
tax advisor
you have to pay these people pretty high rates of
seasons salaries and retainers
to get them to advice you
on the in variety and complexity
of all of the exemptions and deductions that have been written over the years
into the tax cold
it would have ever make
to pay t_v_ individuals that many thousands of dollars per year
unless you were all wealthy person wichita
to be able to expect that even if you pay them ten twenty thirty thousand to
manager taxes
they're going to see
sonicview much more than that
and yes i was going to use the warren buffett example there are many examples
of wealthy people across america you click interview everyone of them
if they were halfway honest which many of them are
they will tell you proudly
how they search for unfounded attacks that fighter
to hold a pay twenty thirty forty fifty thousand dollars
but happily
declawed heath
saved them millions
and what they need is millions of all
peter the great
that they would have to apply if they quit not access
those kind of exemptions penalized yet the videotape uses displayed a great
advocate
voz where what wealthy people pay pain
cleanly
well that's what they know that
and they're proud of that and they're proud of their ability
to tap into these exemptions and let me stress
everything i'm talking about now is legal
i'm not even raising the question old bull we ought to about what is the only
kal
in the united states it is not difficult
to set up bank accounts in the other countries
to instruct the banker in the other country where you set up an account
deal with the money you put into the account
to for example wide-eyed trade stocks and bonds earning youth dividend is
companies
that is certainly have is that we're getting beyond
the scope of just refuting the bar stool economics which you have
great job doing professor richard wool for
thank you so much for joining us to know what my pleasure thank you very much
okay thanks we'll talk again soon