The Lighter Side of Tax Cuts

Sometimes politicians can exclaim; "It's just a tax cut for the rich!", and it is just accepted to be fact. But what does that really mean? Just in case you are not completely clear on this issue, we hope the following will help.

Tax Cuts - A Simple Lesson In Economics: This is how the cookie crumbles. Please read it carefully.

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 comes to $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.
• 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 seemed 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."

So, now dinner for the ten only cost $80. 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 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 the same amount, and he proceeded to work out the amounts each should pay.

And so:

• The fifth man, like the first four, now paid nothing (100% savings).
• The sixth now paid $2 instead of $3 (33% savings).
• The seventh now paid $5 instead of $7 (28% savings).
• The eighth now paid $9 instead of $12 (25% savings).
• The ninth now paid $14 instead of $18 (22% savings).
• The tenth now paid $49 instead of $59 (17% 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 pointed 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 $2? 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, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something 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. Tax the people who pay the most too much and they just may not show up at the table anymore.

There are lots of good restaurants in Europe and the Caribbean.

Disclosure: Author pays a lot of taxes.

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This article has 7 comments:

• Doug Roberts

  Apr 10 06:27 PM
  I enjoyed it. Thank you.
• MarineCorpsV
  et

  Apr 10 08:45 PM

  My Website
  There's entirely too much truth here. The liberals will agree - we should beat up the author.
• hamzzz

  Apr 10 10:10 PM

  My Website
  In the real world the tax cut was not a tax cut at all - it was a tax shift to the future generations. This generation of voters merely shifted the debt burden to the non voting future generations - let the kids pay for our share. The republicans who voted for this tax shift are giving the conservatives a bad name. They voted to invade Iraq which cost the country a trillion dollars and then simply shifted the cost to the kids to worry about. Shame on you!
• David Lentz

  Apr 11 07:52 AM
  And this example does not quite fit the reality of the tax situation in the USofA (land of the not-too-bright and the freeloader) -- if this hypothetical restaurant were to mirror the situation here, the restaurant would RAISE prices, but implement a time-payment scheme to allow the shifting of the patrons' restaurant tab to their children.
  
  We have not had a decrease in government spending for a very, very, very long time (almost forever if one factors in inflation).
  
  And yet the bulk of the clueless taxpayers clamor eagerly for their "tax cuts", and never seem to compare the amount they pay out after the cuts to what they paid out previously.
  
  Truly a nation of Homer Simpsons.
• David Lentz

  Apr 11 12:17 PM
  It is also interesting to use the restaurant example to illustrate the effect of a flat tax system.
  
  If each of the ten patrons were to pay 10% of the bill, the lowest-income four would find the meal so expensive that they would not join the others at subsequent meals, instead begging for table scraps outside the door. The others -- except for the wealthy man -- would restrict their selections from the menu, with an eye on the prices.
  
  The restauranteur would find his sales reduced significantly, and would be hiking prices, not giving a break on prices because business was good.
  
  There is a benefit to a (slightly) progressive tax system. But there is also a point at which the wealthy taxpayers decide that the tax load is simply not worth it, and concentrate on schemes to avoid taxes instead of focusing their efforts on making money. This is clearly not good for the economy.
  
  And then if we go a bit further afield from the restaurant theme, and consider the capital formation process, which funds the economy and keeps everything going, and look at a system that limits the relief investors get when they lose money, we must consider that some sort of incentive for the investors to undertake the risk of their own capital, in the form of lower taxes on those gains. In reality, it's all a lot more complicated than the simple divvying up of a bill among partakers of the meal.
  
  But it's still a great fable, and a wonderful talking point to try and get people to think a bit -- however improbable such an activity would seem to be.
• billddrummer

  Apr 11 04:40 PM
  A great post, but I think there's something missing. If you want to make it like the tax system we have now, in the first example the richest person would pay $69 and the four poorest would get $2.50 apiece. AND eat for free.
  
  In the lowest income brackets, many people receive much more in credits and benefits than they paid in taxes. I know a person who paid $900 in income tax but received a $5,400 refund. Why? Child tax credits and disability income that is sheltered from tax.
  
  There's a wealth transfer effect to the tax system that hides under the umbrella of 'helping the poor.' I submit that one reason people are poor is because they are unable, unwilling, or unconcerned about becoming 'unpoor'--that is, becoming more productive and valuable to society as a whole, thereby raising their income-earning potential. And eventually, their incomes.
• Peter Lynch

  Apr 11 10:11 PM
  Didn't realize that Europe had low tax rate!!!
  
  There are plenty of loop holes for the rich to pay lower taxes, and believe me, most of them take advantage it.
  
  I have lived all over the world, and there is no place that I would rather be than right here in the good old U.S. of A.
  

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