Tax Cuts very interesting Anology

[Pacun]

There are few topics as complex, frustrating, and as misunderstood as taxes. T. Davies, professor of accounting at the University of South Dakota, explains the impact of tax reduction through a remarkably understandable analogy that is both entertaining and informative.

"This is a very simple way to understand the tax laws," says Professor Davies. "Read on, as it does make you think!" Here's his analogy:

"Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. 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 pays $12;

the ninth would pay $18;

and the tenth man, the richest, would pay $59.

"That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement --- until one day, the owner threw them a curve (in tax language a tax cut).

"'Since you are all such good customers,' he said, 'I am going to reduce the cost of your daily meal by $20. So now dinner for the ten only cost $80.00.

"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--the paying customers? How could they divvy up the $20 windfall so that everyone would get his 'fair share?'

"The six men 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 end up being PAID to eat their meal. So the restaurant 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:

as before, the first four men paid nothing;

now the fifth man also paid nothing;

the sixth man now paid $2;

the seventh paid $5;

the eighth man paid $9;

the ninth man paid $12;

leaving the tenth man with a bill of $52 instead of his earlier $59.

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 reduction,' declared the sixth man, but he, pointing to the tenth. 'But he got $7!'. 'Yeah, that's right,' exclaimed the fifth man, 'I only saved a dollar too; it's unfair that he got seven times more than me!'

'"That's true,' shouted the seventh man, 'why should he get $7 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 he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were now Fifty-Two Dollars short of paying the bill. Imagine that!

And that, boys and girls, journalists, and college instructors, is how the 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.

"Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic."

[Eagles Ridge]

Thanks, I love this example and I had lost my copy

[GeneInAlabama]

Thanks Pacun, that is a very good anology. Most people do not agree with me, but I believe a flat tax for everyone with no deductions, no allowances, no nothing would be the best tax we could have. People try to be more righteous than God and try to distribute the burden unfairly. God says give me 10 percent of your increase. Period.

[jainen]

>>the best tax we could have<<

There are two reasons I do not agree. First, in a practical sense, how would you define "income"? When you say "no nothing" do you mean a sole proprietor can't even deduct Cost of Goods Sold? If a company sends an employee on a business trip, is the value of the plane ticket taxable income?

The second reason is philosophical. You may have noticed that the government's budget is not particularly based on revenue. There are any number of OTHER political goals involved in the tax system, such as stimulating certain kinds of economic activity. In my opinion, taxation has always been a useful tool for the public good. Sometimes those issues are more important than the actual revenue stream.

[Randall]

Poor analogy. Lots of problems with our system. I'm not one to 'soak the rich' but then when I think of how they are compensated, I'm left wondering if they are really earning it or just back dooring it from the govt.

[Pacun]

It is amazing how people talk about the tax system or government. The analogy is specifically for tax-cuts. Remember that the diners have been paying $100 for a while.

[jainen]

>>The analogy is specifically for tax-cuts. <<

It's a poor analogy because income tax is not based on the cost of things purchased. It's a trivial, contrived story that pretends there are just as many people in the $59 tax bracket as in the $18 bracket with nobody in between. If you already believe that theory, you might say this is clever. But it is not clever enough to convince anyone who thinks otherwise, so it is really pretty useless.

[MN dhawk]

What I explain to my clients is more like:

http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

[samingeorgia]

"You may have noticed that the government's budget is not particularly based on revenue." Well, there's the problem.

All this borrowing is not sustainable. Taxes, at all levels and for everybody, would need to be doubled to avert long-term exponential growth of government debt. The only alternative is cutting expenditures -- all of them -- and that's not likely to happen because everybody wants to cut the other guy's program. Both political parties have sold this country down the river for the past forty years. All we can do now is watch the wreck.

[Randall]

jainen, MN dhawk, samingeorgia and others.

Good to hear comments from the other side for a change. The talk show hooligans seem to rule the media.

[mircpa]

Rich guy was not only paying for 'his' cost of food but was also paying for other guys food cost. Well then if he was paying more then his part of food cost, obviously when it come savings due to cost reduction he should be one who should save more because more of his money were at stake.

[joanmcq]

The national debt is the result of a more than a decade of 'trickle down' not stimulating the econonmy as well as continuing to put major expenditures on the national credit card rather than on a pay as you go system. The tax cuts put through in the early Bush years (and Regan years) resulted in exactly what the neo-cons wanted; a starving of the government until the burden of debt forced the cuts in the social safety net that they wanted, which is now coming to pass. Either we, in the 90% (last time I checked I wasn't in the top 10 or even 20% even though I do have more net wealth than most in my income level) make up for the inequities passed 10 years ago by passing higher taxes as well as budget cuts to get the system back on track, or we in the 90% will suffer like hasn't happened since the Great Depression. Unfortunately, most of what passes for 'education' on tax matters is dictated by those who benefit, and geared towards hoodwinking those who will suffer. See 'tea party'. Since when did education & intellect (read 'elite' by the mass right wing media) become a dirty word?