Tax
Cuts - A Simple Lesson In Economics
Oftentimes, politicians (and journalists) exclaim, “It’s just
another tax cut for the rich.”
And all too often, such proclamations are simply
(simple-mindedly??) accepted as fact.
But what does that really mean?
In case you are not clear on the issue, consider the
following parable:
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 (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 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. 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. There are lots of good
restaurants in