Here’s a summary of tax laws and the political debate on 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 and the sixth would each pay $3.
The seventh would pay $5.
The eighth would pay $8.
The ninth would pay $12.
The tenth man (the richest) would pay $69.
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement.
Then 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 beer by $20.”
Drinks 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 drink 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 they couldn’t just subtract $3.33 from everybody’s share.
If they did, the the fifth and the sixth man, who were paying $3 each, would end up being paid to drink beer.
The bar owner suggested it would be fair to reduce each ones bill by roughly the same percentage.
He proceeded to work out the amounts each should pay, and proposed:
The fifth and sixth men would now pay $2 instead of $3 (33% savings).
The seventh would now pay $3.50 instead of $5 (30% savings).
The eighth would now pay $5.50 instead of $8 (31% savings).
The ninth would now pay $8 instead of $12 (33% savings).
The tenth would now pay $59 instead of $69 (15% 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, but he got $10!” said the fifth man, pointing to the tenth man.
“That’s right,” exclaimed the sixth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”
“Why does he get $10 back when I got less than two? The wealthy get all the breaks!” shouted the seventh man.
“Wait a minute,” yelled the first four men. “We didn’t get anything at all. The system exploits the poor!”
The nine men then organized a social media campaign to beat up on the tenth man.
The next night the tenth man didn’t show up for drinks. 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 to pay for even half of the bill!
And that is how our tax system works, and the issues that arise when trying to change it.
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.
They might start drinking overseas where the atmosphere is somewhat friendlier.