posted on September 5, 2005 12:27:30 AM new
This is a worthy device for "Understanding Tax Cuts."
The author is unknown (it has been falsely attributed to David R. Kamerschen, Ph.d, Professor of Economics, University of Georgia, his bio specifically denies it, but he did attest to the accuracy of the explanation of how tax cuts work).
Politicians, journalists and other liberals are fond of crying, "It's just a tax cut for the rich!" This, in turn, is often accepted as fact because, to the simple-minded, it "sounds right." But what does it really mean?
The following puts tax cuts in easily "digestible" terms.
Suppose that every day, ten men go out for dinner and the bill for all comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
a. The first four men (the poorest) would pay nothing.
b. The fifth would pay $l.
c. The sixth would pay $3.
d. The seventh would pay $7.
e. The eighth would pay $12.
f. The ninth would pay $18.
g. The tenth man (the richest.) would pay $59.
So, that's what they decided to do. The ten men ate dinner in the restaurant every day, and were all quite happy with the arrangement, until one day, the owner threw them a curve.
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20. Dinner for the ten 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.
The first four would still eat for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his "fair share?"
They realized that the $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 their meal.
So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly same amount, and he proceeded to work out the amounts each should pay.
And so:
a. The fifth man, like the first four, now paid nothing (100% savings).
b. The sixth man now paid $2 instead of $3 (33% savings).
c. The seventh now paid $5 instead of $7 (28% savings).
d. The eighth now paid $9 instead of $12 (25% savings).
e. The ninth now paid $14 instead of $18 (22% savings).
f. The tenth (the richest) now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20," declared the sixth man. He polnted to the tenth man, "but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than me!"
"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison.
"We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for dinner, (NOTE: for a deeper understanding of this phenomenon,read "Atlas Shrugged" by Ayn Rand) so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something very important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest get the most from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore.
In fact, they might start eating overseas where the atmosphere is somewhat friendlier.
