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A fun way to understand the Income Tax cut debate 22 October, 2008

Posted by stoptaxing in Uncategorized.
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Suppose that every day ten friends go out for beer and fodder and that the tab for all ten comes to $100.

If they paid their bill the way we pay our taxes it would go something like this:

The first four (the poorest among them) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth (the wealthiest among them) would pay $59.

So, that’s what they decided to do. The ten friends drank in the bar every day trading fodder and seemed quite happy with the arrangement, until one day, the owner of the establishment threw them a curve. ‘Since you are all such good customers,’ he said, ‘I’m going to reduce the cost of your daily tab by $20.’

Drinks for the ten would now cost just $80.The group still wanted to pay their bill the way we pay our taxes so the first four were unaffected. They would still drink for free. But what about the other six friends – the paying customers?

How could they divide the $20 windfall so that everyone would get their ‘fair share?’ They realized that $20 divided six ways is roughly $3.33 for each, however if they subtracted that from everybody’s share the fifth man and the sixth man would each end up being paid to drink their beer. So, the bar 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.

The breakdown was a follows:

The fifth man, like the first four, now paid nothing.
The sixth man now paid $2 instead of $3.
The seventh man now paid $5 instead of $7.
The eighth man now paid $9 instead of $12.
The ninth man now paid $12 instead of $18.
The tenth man now paid $52 instead of $59.

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the friends began to compare their savings. ‘I only got a dollar out of the $20,’ declared the sixth man. He pointed to the tenth man,’ but he got $7! ”Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar too, it’s unfair that he got seven times more than I did! ”That’s true!!’ shouted the seventh man. ‘Why should he get $7 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 drinks, so the nine sat down and had beers as they traded fodder without him. When it came time to pay the bill they discovered something important. They didn’t have enough money between all of them to cover the bill. They were $52 dollars short.

And that, boys and girls, journalists and college professors, is how our 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 anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

~~

*Many false claims exist but no attribution has ever been credited for the above analogy, too bad …

~~~~~
Matthew A. Opaliski

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