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Tax cut economics

Perhaps like most folks, I always figured when some stiff-collared politician promised, or even delivered, a tax cut, that I would see more money in my hip pocket.

But, alas, tax cuts are often structured for those who can afford to pay the most – the filthy rich.

I’ve tried to figure out how the rich could pay less if their taxes took an upward turn. Finally, it took an e-mail from a friend to explain how this strange scenario works.

Without further ado, I’ll let the author of the original e-mail – Dr. David R. Kamerschen, Professor of Economics at the University of Georgia – explain, in very simple terms, how the rich are able to profit from a tax cut designed for those far below them in financial class.

Dr. Kamerschen writes……..

Let’s put tax cuts in terms everyone can understand. Suppose that every day, 10 men go out for dinner and the bill for all 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 10 men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner

threw them a curve.

&uot;Since you are all such good customers,&uot; he said, &uot;I’m going to reduce the cost of your meal by $20.&uot;

Dinner for the 10 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.

&uot;I only got a dollar out of the $20,&uot; declared the sixth man. He pointed to the tenth man, &uot;but he got $10!&uot;

&uot;Yeah, that’s right,&uot; exclaimed the fifth man, &uot;I only saved a dollar, too. It’s unfair that he got 10 times more than me!&uot;

&uot;That’s true,&uot; shouted the seventh man. &uot;Why should he get $10 back when I got only two? The wealthy get all the breaks!&uot;

&uot;Wait a minute,&uot; yelled the first four men in unison. &uot;We didn’t get anything at all. The system exploits the poor!&uot;

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.