Suppose that every day, ten men go out for beer and 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 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 ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, 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 beer by $20." Drinks for the ten 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 drink for free. But what about the other six men - the paying custom! ers? 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 drink his beer. So, the bar 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 pay $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 drink for free. But once outside the restaurant, the men began to compare thei! r savings. "I only got a dollar out of the $20," dec! lared th e sixth man. He pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"
"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? 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 man and beat him up...
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers 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 drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia
I would also add that it could be quite likely that the tenth man actually may employ some of the other men.
The goal of taxation should NEVER to be to redistribute wealth. Taxation should pay for critical services, to provide for the common defense and those who require help to get on their feet [limited entitlement] and to repay those who have paid into the system [Social Security and Medicare]. And if you want to make a meaningful tax cut that spurs spending and job creation you have to cut it from the well-to-do and the wealthy because the first through the seventh men don't pay enough in taxes for cuts to be have any effect!!
A colleague has characterized the Obama taxation plans very well. It may modestly help the middle class but by soaking the well-to-do but not significantly affecting the truly wealthy. Here's why. Warren Buffett pays less taxes than his secretary because he is so wealthy that he's set up to get his income as dividends rather than orginary income. The wealthy - let's say $2 million per annum and above can afford to invest in tax structures that significantly benefit. But those who do well, say from $250,000 to $1,000,000 in income, may not be able to afford the high priced tax help.
Also let's look at this subset of people. Who are they? They are likely to be financial professionals, physicians, attorneys and consultants. They work hard, spending time away from their families to provide for a comfortable lifestyle. They work for their money and at the end of the day with marginal tax rates (federal, state and city) that can exceed 40% actually support an extremely heavy tax burden. And we haven't counted other taxes like property levies sales tax which would make their real tax level exceed 50%
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