"An Over Simplified Tax Lesson"  May, 2002

I was having lunch at PJ's with one of my favorite clients last week and the conversation turned to the government's recent round of tax cuts. "I'm opposed to those cuts," the retired college professor declared, "because they benefit the rich. The rich get much more money back than ordinary tax payers like you and I, and that's not fair." "But the rich pay more in the first place," I argued, "so it stands to reason that they'd get more money back." I could tell that my friend was unimpressed by this meager argument. Even college professors are a prisoner of the myth that the "rich" somehow get a free ride. Nothing could be further from the truth. Let's put tax cuts in terms everyone can understand. Suppose that everyday 10 men go to PJ's for dinner. The bill for all ten comes to $100. If it was paid the way we pay our taxes -- graduated by income level -- the first four men would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12, the ninth $18; and the tenth man (the richest) would pay $59. The 10 men ate dinner in the restaurant every day and seemed quite happy with the arrangement until 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." Now the dinner for the 10 costs only $80. The first four are unaffected -- they still eat for free. How to divvy up the $20 savings among the remaining six so that everyone gets his fair share became the question to answer. The men realized that $20 divided by six is $3.33, but if they subtract that from everybody's share, the fifth man and the sixth man would end up being paid to eat their meal. The restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same proportionate amount and he proceeded to work out the amounts each should pay. And so the fifth man paid nothings ($1 less), the sixth man pitched in $2 ($1 less), the seventh paid $5 ($2 less), the eighth paid $9 ($3 less), the ninth paid $12 ($6 less), leaving the tenth man with a bill of $52 instead of $59 ($7 less). Outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man pointing to the tenth, "and he 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 back when I got only $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 he didn't show up for dinner. So, the nine men sat down and ate without him. But, when it came time to pay the bill, they discovered something important. They were $52 short! And that, boys and girls and college professors, 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.

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