Understanding Tax Cuts
From Our Mailbag:
[Ed Note: As the subject of tax cuts continues to be a hot topic in Washington, D.C., we thought this little analogy might be timely.]
* * *
This is a very simple way to understand the tax laws. Let's put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for dinner. The bill for all ten totals $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 $7, the eighth $12, the ninth $18, and the tenth man-the richest-would pay $59.
That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement-until one day, the owner threw them a curve (in tax language, a tax cut).
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten only cost $80.00.
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-the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?"
The six men 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 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 the same amount, and he proceeded to work out the amounts each should pay.
And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. 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. "Hey, out of the $20 savings, I only got a dollar, but he got $7!" declared the sixth man as he pointed to the tenth.
"Yeah, that's right," exclaimed the fifth man, "I only saved a dollar, too... It's unfair that he got seven times more than me!"
"That's true!" shouted the seventh man. "Why should he get $7 back when I got only $2? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison who have never paid for anything, "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 he didn't show up for dinner, so the nine sat down and ate without him. When it came time to pay the bill, they discovered a little late something that was very important. They were fifty-two dollars short of paying the bill!
And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.
* * *
[This email has been passed around without author, so no acknowledgment could be given. We provide it solely as fodder for discussion or debate.]