Understanding Tax Cuts

SIMPLE ECONOMICS
My good friend Bob in Florida sent this to me the other day. It is a good way to understand how tax cuts work.

Suppose that every day, ten men go out for lunch 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 would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men ate lunch every day at the lunch counter 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 lunch by $20." (A tax cut!)

Lunch 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 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, like the 1st four,
now paid nothing----------------------(100% savings).
The sixth now paid $2 instead of $3 ---(33% savings).
The seventh now pay $5 instead of $7---(28% savings).
The eighth now paid $9 instead of $12--(25% savings).
The ninth now paid $14 instead of $18--(22% savings).
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 I!'

'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 day the tenth man didn't show up for lunch, so the nine sat down and had lunch 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.

~ Author Unknown

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For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

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Tennessee Granddaddy Says:

Live each day as if it were your last day on earth,

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Quote of the Day

No one can make you feel inferior without your consent.
- Eleanor Roosevelt

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For something really funny,
check out the post on my other blog today:

Diet Scoreboards

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Joke of the Day

A Dutchman was explaining the red, white, and blue Netherlands flag to an American. “Our flag is symbolic of our taxes. We get red when we talk about them, white when we get our tax bills and blue after we pay them.”

The American nodded. “It’s the same in the United States of America only we see stars too!”

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