'Yeah, That is Unfair!' (How our tax system works)

I don't claim to be an economist nor do I play one on TV. But, I know a good illustration when I see one and this is a good one. This illustration has made the Internet rounds in previous years but seems particularly relevant now, especially in light of the 'class warfare' rhetoric we're hearing these days. While I can't verify the author (authorship is credited to several different people), the premise remains unchanged, which is, since the wealthy pay most of the taxes it should be no surprise that they will also benefit most from tax cuts. (The actual percentages in the illustration may not be exact given today's tax rates but the principal remains the same.)

Please, let me be clear: I am not 'sticking up for the rich one percenters' but neither am I 'siding with the cries of the complainers and occupiers.' I'm just trying to bring some clarity (and hopefully sanity) to the incorrect argument that all we need to do to get out of our fiscal mess is 'make sure the rich are paying their fair share' by increasing their taxes. 

(Side note: I think all who pay taxes pay too much in taxes. We don't have a revenue problem, we have a spending problem).

You must read all the way to the end but if you do I think you'll find the read worthwhile. Here it goes….

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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 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 drank in the bar 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 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 if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his 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 fifth man, like the first 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 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 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 night the tenth man didn’t show up for drinks, so 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 for even half of the bill!

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And that 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. 

Since the probability that any of us has ever been employed by a 'poor' person is quite low I suggest we refrain from trying to punish those who take the risk, invest the funds and create the jobs. They are not philanthropists. They are in business to make money. Make it too hard on them and they might not 'show up anymore.'