Tax Cuts For The Rich

Very few things get me as mad as when public officials used their office to help their buddies. One thing that DOES get me about that mad is when people try to use catchy phrases to get people’s emotions stirred up and set them against something based on their emotional reaction rather than on fact.

A prime example? “Tax cuts for the rich.”

Many democrats have accused President Bush and Republicans of giving “tax cuts to the rich” and trying to screw the average person. A simple lesson in economics, divorced from the emotional charge that comes from thinking that you’re getting bent over, will show just how inaccurate these allegations are.

In order to put tax cuts in terms everyone can understand, suppose that every day 10 men go out to eat for dinner at the same restaurant. Every night, the bill for all ten comes to $100.

If they paid their bill the way that 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 $7, the eighth $12, and the ninth $18. The tenth man (the richest) would pay $59.

So that’s what the men decided to do. All of them agreed that the arrangement was acceptable and were happy with the arrangement. That is, until one day the owner threw them a curve.

“Since you are all such good customers,” said the owner, “I’m going to reduce the cost of your daily mean by $20.”

Although the cost of their meal was now only $80 a day, the men still wanted to pay for their food the same way we pay our taxes.

The first four men were unaffected, and still paid nothing. Yet what about the other six, the ones who paid for it all? 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 and the sixth men would each end up actually getting PAID to eat their meal.

So the 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 that each man would 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 man now paid $49 instead of $59 (16% savings).

Each of the six men was better off than they were before, and the first four continued to get free meals. But once they got outside the restaurant, the men began to compare their savings.

“I only got $1 out of $20,” declared the first man, “but he (pointing at the tenth man) got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved $1 too. It’s unfair that he got ten times as much as me!”

“That’s true!!!” shouted the seventh man. “Why should he get $10 back 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. This system exploits the poor!”

The nine men proceeded to surround and beat up the tenth man.

The next night the tenth man didn’t show up for dinner, so the nine sat down and ate without him. When it came time to pay the bill they discovered something important.

Even between all of them, they didn’t even have enough money for half of the bill.

And that, boys and girls, journalists and 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 at the table any more.

Hope you enjoyed your economics lesson for the day.

Numbers courtesy of David R. Kamerschen, Ph.D.
Professor of economics
Brooks Hall
University of Georgia