NevGroom
27-03-2007, 08:11 AM
This is from an American professor (allegedly)and is particularly relevant just after a 'tax cutting' budget
Some politicians, journalists and others exclaim; "It's just a tax cut for the rich!" -- and that claim is generally accepted to be fact, without questioning it. But what does that really mean?
Just in case you are not completely clear on this issue, the following might help:
Let's put tax cuts in terms everyone can relate to.
Suppose that every day, 10 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 4 men [the poorest] would pay nothing.
The 5th would pay $1.
The 6th would pay $3.
The 7th would pay $7.
The 8th would pay $12.
The 9th would pay $18.
The 10th man [the richest] would pay $59.
So, that's what they decided to do.
The 10 men drank in the bar every day and seemed quite happy with the arrangement,until one day, the owner threw them a curve ball.
"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 4 men were unaffected. They would still drink for free.
But what about the other 6 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 everybody's share, then the fifth man and the sixth man would each end up being paid to drink their beer.
So, the bar 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 first 4 men [the poorest] would still pay nothing.
The 5th man, like the first 4, now also paid nothing [100% savings].
The 6th now paid $2 instead of $3 [a 33%savings]
The 7th now paid $5 instead of $7 [a 28%savings].
The 8th now paid $9 instead of $12 [a 25% savings].
The ninth now paid $14 instead of $18 [a 22% savings].
The 10th now paid $49 instead of $59 [a 16% savings].
Each of the 6 was better off than before.
And the first 4 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" declared the 6th man.
He pointed to the 10th man," but he got $10!"
"Yeah, that's right," exclaimed the 5th man. "I only saved a dollar, too.
It's unfair that he got 10 times more than I did!"
"That's true!!" shouted the 7th man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first 4 men in unison. "We didn't get anything at all. The system exploits the poor!"
The 9 men surrounded the 10th and beat him up.
The next night the 10th tenth man didn't show up for drinks, so the 9 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 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 drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, PhD
Professor of Economics
University of Georgia
Some politicians, journalists and others exclaim; "It's just a tax cut for the rich!" -- and that claim is generally accepted to be fact, without questioning it. But what does that really mean?
Just in case you are not completely clear on this issue, the following might help:
Let's put tax cuts in terms everyone can relate to.
Suppose that every day, 10 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 4 men [the poorest] would pay nothing.
The 5th would pay $1.
The 6th would pay $3.
The 7th would pay $7.
The 8th would pay $12.
The 9th would pay $18.
The 10th man [the richest] would pay $59.
So, that's what they decided to do.
The 10 men drank in the bar every day and seemed quite happy with the arrangement,until one day, the owner threw them a curve ball.
"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 4 men were unaffected. They would still drink for free.
But what about the other 6 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 everybody's share, then the fifth man and the sixth man would each end up being paid to drink their beer.
So, the bar 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 first 4 men [the poorest] would still pay nothing.
The 5th man, like the first 4, now also paid nothing [100% savings].
The 6th now paid $2 instead of $3 [a 33%savings]
The 7th now paid $5 instead of $7 [a 28%savings].
The 8th now paid $9 instead of $12 [a 25% savings].
The ninth now paid $14 instead of $18 [a 22% savings].
The 10th now paid $49 instead of $59 [a 16% savings].
Each of the 6 was better off than before.
And the first 4 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" declared the 6th man.
He pointed to the 10th man," but he got $10!"
"Yeah, that's right," exclaimed the 5th man. "I only saved a dollar, too.
It's unfair that he got 10 times more than I did!"
"That's true!!" shouted the 7th man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first 4 men in unison. "We didn't get anything at all. The system exploits the poor!"
The 9 men surrounded the 10th and beat him up.
The next night the 10th tenth man didn't show up for drinks, so the 9 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 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 drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, PhD
Professor of Economics
University of Georgia