A good math lesson:
by: David R. Kamerschen, Ph. D
Sometimes politicians, journalists and the liberal
left exclaim; "It's just a tax cut for the rich!" and
it is just accepted to be fact.
But what does that really mean?
Just in case you are not completely clear on this
issue, I hope the following will help. Please read
it carefully.
Let's put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for dinner
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 dinner in the restaurant 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 meal by
$20." Dinner 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 everybody's share, then
the fifth man and the sixth man would each 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.
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 paid $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 me!"
"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 dinner,
so the nine sat down and ate 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.
David R. Kamerschen, Ph. D
Professor of Economics
by: David R. Kamerschen, Ph. D
Sometimes politicians, journalists and the liberal
left exclaim; "It's just a tax cut for the rich!" and
it is just accepted to be fact.
But what does that really mean?
Just in case you are not completely clear on this
issue, I hope the following will help. Please read
it carefully.
Let's put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for dinner
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 dinner in the restaurant 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 meal by
$20." Dinner 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 everybody's share, then
the fifth man and the sixth man would each 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.
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 paid $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 me!"
"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 dinner,
so the nine sat down and ate 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.
David R. Kamerschen, Ph. D
Professor of Economics
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