How Taxes Work

Here is an oldie but a goodie that I thought would be appropriate to share again because it is a VERY simple way to understand how taxes work.

Suppose that every day, ten men go out for dinner together. The bill for all ten men comes to $100. If they pay 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, and the tenth man, the richest, would pay $59. That's what they decide 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 the men a curve ball. In tax lingo it's called a tax cut. "Since you are all such good customers," the owner said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten men costs only $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 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 the way we pay our taxes and he proceeded to work out the amounts each should pay.

It was determined that the fifth man would pay nothing, the sixth man would pitch in $2, the seventh would pay $5, the eighth would pay $9, the ninth would pay $12, leaving the tenth man with a bill of $52 instead of his earlier $59.

Each of the six men were better off than before and the first four men 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. "But he, pointing to the tenth man, 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 benefit when I only got $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, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late, something very important. They were 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 of us?

Unfortunately, most taxing authorities do not seem to grasp this rather straight-forward logic!