Paul Oei passed this on to me, and I thought it a useful way to add to the thinking about taxes and tax cuts. It’s a variation on an Internet chestnut that’s been making the rounds, and appeared in my comments over at Armed Liberal.com:
The Real Truth about Taxes
by Anonymous
Let’s put taxes in terms everyone can understand, but with enough detail to show why they work that way.
Suppose that every day, ten men go out for dinner at their favorite restaurant “The Economy”. The bill for all ten meals comes to $100. If their meals reflected their wealth, the orders would look something like this:
-The first 2 men rarely show up. Their wives would kill them if they spent the rent money eating out every day. (20% of income earners made under $10,000 in 1999)
-The 3rd and 4th men buy soup and salad, so they can take the salad and some bread home to their families. (The next 20% of income earners made $10,000 to $19,000)
-The fifth man ate his soup AND his salad (His 10% of income earners made $20k to $25k)
-The sixth man had a hamburger and a soda (His group made $20k to $35k)
-The seventh man had ribs and an iced tea (His group made $35k to $50k)
-The eighth man had soup, steak and a beer. He passed on dessert, so his daughter could go to college. (His group made $50k to $75k)
-The ninth man had a salad, steak, some wine and a fruit tart for dessert (His group made $75k to $200k)
-The tenth man ordered a seared ahi appetizer, a caesar salad, a juicy cut of filet mignon with hearts of palm au gratin, the house’s best wine and some crème brulee for dessert. (He is representative of the top 2% of income earners, who made anywhere from $200k to $100 Million).
Now they decided to pay their bill like we pay our taxes so:
The first two men-the poorest-would pay nothing
The third and fourth men would pay $1 each
The fifth and sixth men would pay $2 each
The seventh $10
The eighth $12
The ninth $29
The tenth man (the richest) would pay $43 (Not bad for that meal!)One day, the owner threw them a curve.
In order to keep his customers paying money into “The Economy”, he said, “I’m going to reduce the cost of your daily meal by $20.”So now dinner for the ten only cost $80.
How could they divvy up the $20 windfall so that everyone would get his
“fair share?”(The data above is based on real data. The endings below are hypothetical.)
The optimist’s (or liberal’s – A.L.) ending:
The 10th man, who cared about his friends, realized they had few luxuries and decided he could at least split the difference equally.
The 20 dollars divided by the 6 paying customers came to $3.33 each.
The first six men would be paid to eat. That wouldn’t be right, so the money is pooled so that all six could attend and eat a better meal. Remember, the first 2 couldn’t even come to the meal before.
The seventh man paid $6.67.
The eighth man paid $8.67.
The ninth man paid $14.67.
The tenth man paid $25.67.In the short run, “The Economy” lost some money, but since the men had more expendable income, they were able to buy better meals, more appetizers and desserts. And so “The Economy” actually did better. The tenth man, who happened to hold 50% of the stocks in “The Economy” (as well as a few other restaurants) profited doubly from the shared savings (as the wealthy often do).
Trickle-down ending:
Because the 10th man ate the bulk of the food and paid the bulk of the bill up until now, the owner awarded the 10th man a much larger savings than the others. The 10th man, only able to consume so much on any given evening, didn’t reciprocate by ordering much more at future dinners. Instead, he opted for an after-dinner cigar. The other nine men, respecting that the 10th probably worked hard to get where he is (unless, of course, it was inherited), walked away muttering…”I would have used that money to buy a better dinner.” It occurred to the owner of “The Economy” that he had empowered a small percentage of his customers to fill his cash registers. His smaller consumers bought less because they had little spending power. Rather than empowering 8 consumers to spend, he had concentrated his efforts on one.
The pessimist’s ending:
It didn’t matter how the men split the savings. The foolish owner had not taken the cost of running “The Economy” into account. He could barely afford to pay for the infrastructure of “The Economy”, such as rent, cash registers, kitchen supplies and food. In order to pay for “The Economy’s” infrastructure, he could no longer afford his head chef. It was the head chef that trained the other chefs. In other words, education went to pot. Sure, the burgers were still OK, but the filet mignon was never quite right, and the crème brulee was always runny. The tenth man began frequenting other restaurants like “IRA’s Diner” and “Bond’s Place”. “The Economy” lost over 30% of that $80 and went into a downward spiral until it was forced to close.
All tax and income data is taken from the following source:
http://www.irs.gov/pub/irs-soi/99in11si.xls
(added link to IRS data)