Friday, July 02, 2004

How Tax Cuts Work

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You've heard the cry in the past "It's just a tax cut for the rich!",
and it is accepted as fact. But what does that really mean?

The following explanation may help.

Suppose that every day, 10 men go out for dinner. The bill for all 10
comes to $100. They decided to pay their bill the way we pay our taxes,
and it went like this:

* The first four men (the poorest) paid nothing.
* The fifth paid $1.
* The sixth $3.
* The seventh $7.
* The eighth $12.
* The ninth $18.
* The tenth man (the richest) paid $59.

All 10 were quite happy with the arrangement, until one day, the owner
said: "Since you are all such good customers, I'm going to reduce the
cost of your daily meal by $20." So now dinner for the 10 only cost $80.

The group still wanted to pay their bill the way we pay our taxes.

The first four men were unaffected. They would still eat for free. But
how should the other six, the paying customers, divvy up the $20
windfall so that everyone would get his "fair share"?

They realised that $20 divided by six is $3.33. But if they subtracted
that from everybody's share, then the fifth and sixth men would each end
up being paid to eat. The restaurateur suggested reducing each man's
bill by roughly the same percentage, thus:

* The fifth man, like the first four, now paid nothing (100% saving).
* The sixth paid $2 instead of $3 (33% saving).
* The seventh paid $5 instead of $7 (28% saving).
* The eighth paid $9 instead of $12 (25% saving).
* The ninth paid $14 instead of £18 (22% saving).
* The tenth paid $49 instead of $59 (16% saving).

Each of the six was better off, and the first four continued to eat for
free, but 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!" "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 $2? 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. The nine sat
down and ate without him, but when they came to pay the bill, they
discovered that they didn't have enough money between all of them for
even half of it.

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 at the table anymore. There are
lots of good restaurants in Monaco and the Caribbean(tax saving havens)

With thanks to David R. Kamerschen, Professor of Economics, University
of Georgia.

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Abhinav |