Sometimes politicians, journalists and others 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, I
hope the following will help. Please read it carefully. Let's put tax
cuts in terms everyone can understand.
Suppose that every day, ten men go out for dinner and the bill for all ten
comes to $100.
If they paid their bill the way we pay our taxes, it would go something
a.. The first four men (the poorest) would pay nothing.
b.. The fifth would pay $1.
c.. The sixth would pay $3.
d.. The seventh would pay $7.
e.. The eighth would pay $12.
f.. The ninth would pay $18.
g.. 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." Dinner for the ten 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 eat 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
every body'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.
a.. The fifth man, like the first four, now paid nothing (100% savings).
b.. The sixth now paid $2 instead of $3 (33% savings).
c.. The seventh now paid $5 instead of $7 (28% savings).
d.. The eighth now paid $9 instead of $12 (25% savings)
e.. The ninth now paid $14 instead of $18 (22% savings).
f.. 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 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 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 anymore. In fact, they might start
eating overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, PhD
Professor of Economics
University of Georgia