How Taxes Work

[terry1156]

This story was taken from an email I received recently

How Taxes Work . . .

This is a VERY simple way to understand the tax laws. Read on -- it does make you think!!

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. 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 $7, the eighth $12, the ninth $18, and the tenth man - the richest - would pay $59.

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 (in tax language a tax cut).

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten only cost $80.00.

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 ? the paying customers? 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 man and the sixth man would 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 paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. 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 who pointed to the tenth. "But 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 sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, 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.

Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!

[Tree0164]

I like it

[jmjj215]

Love it. I hope to benefit the most from tax cuts!

[normanleonard]

Great idea

[meaghanchan]

Any tax break has to come from somewhere. If a country that is deeply in debt is running a surplus for a number of years, one might think that the responsible thing to use the surplus to pay down some of the debt.

Instead, the surplus was sent back to the American public, and yes, as that analogy shows, benefitted mainly the wealthiest Americans.

Now, our country is even deeper in debt.

I see people on these boards complain every day about people who are in debt-- whether it's their spouses sabotaging their efforts to be debt-free, or relatives or neighbors who are deeply in debt but buying themselves luxury cars or brand new electronics.

Maybe a better analogy for the tax cuts is a family- A family who has just received, thanks to the prosperity and growth of the late 1990s, a huge bonus. That family, deeply in debt, could have used their bonus to pay down some of their credit cards, or put some money in savings. Instead, they divided up the money and gave each member a little cash, to spend on whatever they wanted.

I think it's valid to say that maybe this money wasn't spent in the best way it could have been (and yes, I still think that 'tax cuts for the wealthy' is a valid description of how it was spent) and I predict that the consequences of our growing national debt are going to be pretty dire.

Edited to say: Apologies, I had no idea I was responding to a post that was so old.

[MonkeyMama]

Just saw this - very interesting.

A HUGE issue in California. The state is financed by a few wealthy people, with one foot out the door... Was just reading a pretty interesting article on the topic in regards to our state.

Our state tax system depends entirely on a few wealthy having a good investment and/or a good business year. IF not, the state is SOL.

[krayziebone33]

That was an interesting read. Thank you for the information.

[Broken Arrow]

Oh that was an interesting story!

[greedy4chips]

Great story no matter how old it is!

I am still getting over the wounds from that beating by the way....

[disneysteve]

Great story. I think some of my fellow New Jerseyans need to read it and be reminded how the sky high taxes in our state are forcing more and more high income earners to move elsewhere.

[kv968]

Originally Posted by disneysteve

Great story. I think some of my fellow New Jerseyans need to read it and be reminded how the sky high taxes in our state are forcing more and more high income earners to move elsewhere.

Here, Here!!!

[backtaxpro]

Love the post. I have actually read this before elsewhere. It is true that people say tax cuts are unfair for the upper middle class and rich but that is because they pay the majority of the taxes. Eventually, the middle class and poor in socialized countries pay nothing so they don't care about taxes anymore. But what they fail to recognize, is that taxes are usually implemented by politicians playing class warfare and that they have taxes in general today because eventually taxes will trickle down to the people who actually supported higher taxes and more taxes on the rich.

[Taxplanr]

Great Post! It seems meaghanchan missed the point. Giving the tax breaks to the wealthy actually saw them receive the least benefit from the tax breaks of the nineties and Bush.

Did the rich receive more benefit from the system when their taxes were lower? The answer is NO. The rich received the same benefit. Did the poor take a cut in benefits when the rich paid less in taxes? NO and actually charitable giving from the rich was higher.

The tax system is a means for government to decide what is best for us and then implementing it in a very inefficient manner for the profit of politicians and large corporations. Taxing the rich makes money for the politically connected rich instead of all the rich and us not so rich. Government takes away more of our freedoms and resources and distributes it in the most inefficient means possible.

The only way government can increase its own efficiency is to reduce spending.