The US Tax System & Tax Cuts
The US Tax system: I was having lunch with one of my favorite clients last week and the conversation turned to the governments recent round of tax cuts. I am opposed to those tax cuts, the retired college instructor declared, because they benefit the rich. The rich get much more money back than ordinary taxpayers like you and me and that is not fair.
But the rich pay more in the first place, I argued, so it stands to reason that they would get more money back. I could tell that my friend was unimpressed by this meager argument.
So I said to him, lets put tax cuts in terms everyone can understand. Suppose that every day 10 men go to a restaurant for dinner. The bill for all ten comes to $100. If it was paid the way we pay our taxes, the first four men 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.
The 10 men ate dinner in the restaurant every day and seemed quite happy with the arrangement until the owner threw them a curve. Since you are all such good customers, he said, I am going to reduce the cost of your daily meal by $20. Now dinner for the 10 only costs $80. (Tax cut)
Now to figure out how to divvy up the $20 savings among the six that pay for dinner so that everyone gets his fair share back? The men realize that $20 divided by 6 is $3.33, but if they subtract that from the six that paid, then the fifth man and the sixth man end up being paid to eat their meal.
The restaurant owner suggested that it would be most fair to reduce each mans bill by roughly the same percentage, being sure to give each a break, and he proceeded to work out the amounts each should pay. The first 4 still paid nothing, but now the fifth man instead of paying $1 paid nothing, the sixth pitched in $2 instead of the $3, the seventh paid $5 instead of the $7, the eighth paid $9 instead of the $12, the ninth paid $12 instead of the $18, leaving the tenth man with a bill of $52.
Outside the restaurant, the men began to compare their savings. I only got a dollar out of the $20, complained the sixth man (who now pays $2 instead of the $3), and pointing to the tenth man indicated he gets $7 (paying $52 instead of $59).
Yeah, that's right, exclaimed the fifth man. I only saved a dollar too (now paying nothing instead of paying $1). Its 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 (now paying $5 instead of the $7)? 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 next night the tenth 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 were $52 short!
And that, boys, girls and college instructors, is how America's tax system works.