Apropos of Nothing

December 20, 2008

How Taxes Work …

Filed under: Newsworthy,Politics — aproposofnothing @ 9:39 pm

via Planck’s Constant

How Taxes Work …

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, and the tenth man — the richest — would pay $59.

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 (in tax language a tax cut).

“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 $80.00.

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 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 paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. 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 who pointed to the tenth. “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 me!”.

“That’s true!” shouted the seventh man, “why should he get $7 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 any of the 20 bucks. Where is our fair share? The system exploits the poor!”

The nine men surrounded the tenth and beat him up. The next night he 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, a little late what was very important. They were FORTY-FOUR DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, is how the 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.

Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!

3 Comments »

  1. This story is offensive representation of a democratic society. First of all the idea that the reigning adminstration owns the country and is empowered to treat it as their own business is both horrid and too close to the apparent truth of the Bush administration. (I don’t know if other governments with radically conservative leadership are equally prone to a disproportionate sense of their own entitlement to power and privilege.)

    Another offense against the truth is the idea that the citizens would not take into account the disproportionate level of non-financial burdens that the poor bear. Consider that while the rich pay for our wars abroad, it is the poor who bear most of the burden of sacrificing their sons, daughters, husbands, wives, and friends. In a democratic society everyone bears some cost to maintain the infrastructure that makes the peace and prosperity possible.

    The financial burden is only one of the costs and the rich are rightly taxed more heavily because the benefits they gain from infrastructures like the SEC, the banking system, and others is heavily in their favor. Taxes, along with certain kinds of government service, are the membership dues we all pay to enjoy peace and prosperity.

    I re-wrote this little conservative fable with a more liberalized slant and a few critical points in a blog post a couple years ago, (though I hope that the points of critique above transcend ideological lines):

    http://blog.attitutor.com/2006/06/tax-math-reframed.html

    Enjoy,

    Don Berg

    Comment by Don Berg — January 13, 2009 @ 4:58 pm | Reply

  2. One way to ‘see’ the distribution of wealth in the U.S. is to imagine a group of 100 people who have a $100 between them. Evenly distributed each would have one dollar of wealth. Alas, that is far from the actual distribution. According to the most recent study, Currents and Undercurrents, by the Survey of Consumer Finance (Federal Reserve, Department of Treasury, 2006) wealth is distributed accordingly:

    50 individuals at the bottom have a nickel
    The next 40 each have $0.70 of wealth
    The next 9 each have $4.00 of wealth
    The last richest individual has $33.40

    There’s nothing like rich people complaining about how tough things are.
    In the US 1 percent of people have a third of the wealth.
    Now I really doubt this blogger is in the top one percent, but is really someone who does not realize how much he is getting screwed.

    Comment by drHoward — February 10, 2009 @ 10:16 pm | Reply

  3. So, according to this parable, and the liberal reply, the wealthiest guy has 33% of the wealth and pays 59% of the bill. I would complain if it was me! Let’s say I’m guy number 8. My vote would be to remove three of the free loaders. It would cost less to feed the remaining 7, and I would not object to kicking in for our one poor friend.

    Comment by Frank gallo — June 23, 2009 @ 8:31 pm | Reply


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