Taxes Explained
Sometimes politicians, journalists and others exclaim;
"It's just a tax cut for the rich!" and it is just accepted to be
fact, without questioning it. But what does that really mean?
Just in case you are not completely clear and/or do
not understand this issue, the following should help, if you are a
reasonable person.
Let's put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for beer and
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 would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy
with the arrangement, until on 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 beer by $20."Drinks for the ten of you
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. They would still d
rink 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 $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 drink his
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.
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 pay $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 (16% savings).
Each of the six was better off than before. And the
first four continued to drink 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 I!"
"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
drinks, so the nine sat down and had beers 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. 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 somewhere else where the
atmosphere is friendlier.
David R. Kamerschen, PhD
Professor of Economics
University/Georgia
CLEAR EXPLANATION OF TAX CUTS
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