Lehman Brothers Bankruptcy 9/15/08

On September 15, 2008, the Lehman Brothers investment bank filed for bankruptcy, resulting in the loss of many jobs and threatening future bankruptcies in other large U.S. businesses, such as A.I.G.  Prior to this announcement the company did attempt to survive by asking help from the U.S. Federal Reserve, which was refused, as well as the possibility of selling itself to either the Bank of America or Britain’s Barclays, also refused as it was seen as a great financial risk in the falling economy. However, the Bank of America did purchase Merill Lynch feeling it was a lesser risk. Also with the collapse of Lehman Brothers the Federal Reserve expanded their supply of money help for major U.S. companies, which later saved A.I.G. when it was also close to financial meltdown. The results of this devastation led to a drop in value of the U.S. dollar and a big fall on the stock markets.

Perhaps the most important question associated with this event is “Why did it happen?” The most general answer to this question that I have found is that Lehman Brothers investment bank took big risks, risks that were too big. Their risks were particularly connected to their loans, leading them to hold large mortgages and property estates. The loans they supplied were too risky, as they could not be paid, resulting in debt and the holding of property estates, which were losing their value in this frequent pattern. Eventually, Lehman Brothers was losing money in this costly risk of loaning. Their stocks began to fall and they were also losing money. They had to ask other large companies for financial, money assistance. While this held them over for a time, it could not sustain the company for long. The debt grew to the point were a decision had to be made either be granted money by the U.S. government or sell the company. Both plans led to failure as their debt was too great a risk for anyone to save it.

nytimes.com; news.bbc.co.uk; business.timesonline.co.uk

What I found surprising about taxation…

I was somewhat surprised to learn that sales tax was regressive. I have never considered the idea before and this concept still leaves me a bit confused. By comparing the percentages between the “poor” and the “rich”, and considering the consumptions and incomes of both groups puts it in realistic terms that are easier to understand. This allowed me to visually compare and realize that while the “rich” and “poor” may spend the same money on basics–as well as sales tax– but, since their incomes differ so do the percentages of their incomes spent. Therefore, the poor lose more of their money than the rich, making the sales tax more regressive. Within these terms I think this concept makes more sense to me, it seems really basic now.

write a blog post outlining which tax system you think is best (400 words)

There are three major tax systems; progressive tax, proportional tax, and regressive tax.  The first, progressive tax system, has a rate that reflects a pattern that increases the tax as the income increases. For example, compared to a lower income, a higher income has a higher percentage of tax paid, whereas the lower income would have a lower percentage of tax paid out of his income. The second, proportional tax system, has a constant rate for the percentage of income paid in tax, or a fixed rate. Therefore as income increases the percentage paid in tax also increases at a fixed rate. The third is a regressive tax system. This system has a flat rate so that as the income increases the percentage paid in tax decreases.

All three of these systems have their pros and cons.

Within the progressive tax system a higher percentage of money is taken from those with higher incomes. This could be a positive thing as it creates equity between classes, and serves benefits to those less fortunate. However, it also takes more money away from those who work hard and earn higher incomes, and uses the money to grant benefits that can be enjoyed by those of lower incomes which seems to question equality. This system is not the most efficient at promoting hard work since those of lower incomes receive rather large benefits and pay a lower percentage in taxes.

The proportional tax system may be considered rather fair as well, because it has a fixed rate for all incomes that prevents preferences towards those of higher or lower incomes.

A regressive tax system may seem unfair as it takes a larger percentage of money from those of lower incomes than those of higher incomes. While this is true it also persuades individuals to work harder allowing them to earn more income and enjoy more of their income.

Overall, of all these tax systems I find myself preferring the proportional tax system, because it seems logically fair. Those of higher incomes pay more in taxes and those of lower incomes pay less, but at a fixed percentage rate that does not change percentages based on income.