How Tax Cuts Work
This blog is a bit different from usual – as I didnt actually write what comes below. It was sent to me through the Wairarapa Property Investors Association, of which I am a member. It was sent to them via a local Lawyer, Simon Ogilvie.
Anything that helps people to get their head round Taxes is good as far as I’m concerned; no matter how much time I spend learning about Personal Finance – it is always the Taxes that make my brain try and run for the hills. 
This explains why, when it is time for Tax Cuts, it will give the Wealthiest people a bigger $ amount than the less wealthy. And why this is not as unfair as it often seems.
“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 one 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 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 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 their savings.
‘I only got a dollar out of the $20, ‘declared the 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 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 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 and 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”.
Attributed to David R. Kamerschen,
Ph.D. Professor of Economics at
University of Georgia but denied by him.
Statistics not adjusted for New Zealand but you get the picture!
Related posts:
- They giveth with one hand – and snatch it right back with the other one.
- Wow – big cheeses are taking pay cuts!
- Does Dilbert work at IBM New Zealand? (Updated)
Comments
7 Comments on How Tax Cuts Work
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Cheri on
Thu, 19th Feb 2009 5:01 pm
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Andrew on
Sat, 21st Feb 2009 7:13 pm
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Hubby on
Sat, 21st Feb 2009 7:24 pm
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Jon on
Mon, 15th Feb 2010 5:53 pm
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Avalon on
Tue, 16th Feb 2010 12:45 pm
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Tax isn’t fair – deal with it | Business Blogs on
Mon, 29th Mar 2010 11:17 am
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Tax isn’t fair – deal with it | Property Blogs on
Mon, 29th Mar 2010 11:43 am
OMG, I think even I understand now! lol
That is excellent – I really like that
Things that make you go hmmmm.
Interesting that a lot of Kiwi’s who are after the higher salaries, head off to Australia (30,000+ of them a year, which is 1% of the population), leavings those behind with more basic tax to pay, in order to keep the Govt. in the style to which it has become accustomed.
So why cut taxes? We’ll it a more efficient way of putting money into the economy, than increasing benefits. Just don’t take the money in the first place. It also doesn’t harm the popularity to be giving out something more than a ‘chewing gum’ sized tax cut.
You are doing it wrong.
Suppose that every day, ten men go out for beer and they order 10 glasses of beer (or 120 ounces of beer). If they split up the beer the way that wealth is distributed in the U.S.A, it would go something like this:
The first five men (the poorest) would get a sip of beer each or 0.672 ounces.
The next four men would get a small glass of beer each or 8.22 ounces.
The tenth man (the richest) would get 7 glasses of beer or 83.76 ounces.
The ten men went to the bar every day and the tenth man seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Inflationary pressures are rising,” he said, “I’m going to reduce the amount of your daily beer by 20 ounces. You will now receive 10 glasses of 10-ounces each, or 100 ounces total.”
The group still wanted to split up the beer the way that wealth is distributed in the U.S.A. How could they divide the loss of 20 ounces of beer so that everyone would lose his ‘fair share?’ They realized that 20 ounces divided by ten is 2 ounces.
But if they subtracted that from everybody’s share, then the first five men would have to pay the bartender 1.328 ounces of beer each. So, they decided to only take 0.672 ounces of beer from each of the first 5 men and take the remaining 16.64 ounces from the remaining 5 men.
Each of the first five men would give up the sip of beer (0.672 ounces) that they received (a loss of 100%).
Each of the sixth, seventh, eighth, and ninth men would give up 1.17 ounces each (a loss of 14.2%).
The tenth man would give up 11.95 ounces of beer (or a loss of 14.2%).
The result:
Each of the first five men would receive no beer.
Each of the next four men would receive 7.05 ounces.
The tenth man would receive 71.81 ounces of beer.
Each of the first five was worse off than before, having lost all of their beer. The next 4 were worse off, since they no longer received a full 8-ounce glass of beer. The tenth man still received 71.81 ounces (~ a six-pack), and was still happy.
But once outside the restaurant, the men began to compare their losses.
The first five men said, “We lost a sip of beer each. We don’t get beer any more.”
“Well, we lost more than a quarter of our beer” said the next four men “It’s unfair that you only lost a sip of beer. We lost twice as much as each of you did.”
“Wait a minute!” yelled the tenth man. “I gave up a whole glass of beer! I gave up more than all of you combined!!! The poor get all the breaks! First, they get free beer, and then they complain when they lose their free beer! The middle class are always whining about everything because they’re too dumb to get as much beer as I do.”
The tenth man called security, and the first 5 men were told to leave the premises, since they could not afford to pay for any beer.
The next 4 men stood silently watching, not wanting to risk the loss of any of their remaining beer.
The tenth man got into his chaufferred limo and went home.
The next night the first five men didn’t show up for drinks, so the remaining five sat down to have beers without them. But, they discovered something important.
The first five men didn’t show up to:
* harvest the grain and hopps to make the beer
* drive the trucks to bring the beer to the bar
* clean the beer glasses and sweep the floor of the bar
* serve the beer
* and, most importantly, work as the security guards to protect the tenth man and his beer
And that, boys and girls, journalists and college professors, wingnuts and supply-siders, big-c and little-c conservatives, is how wealth is distributed in the U.S.A. The people who have the most money get the most beer. Take too much “beer” from the poorest people, belittle them for being poor, and they just may not show up anymore to make and serve your beer.
I kinda zoned out during Paragraph 3 Im afraid. But them im one of the ones paying for the damn beer!
[...] If you want to see a good and funny illustration of why “tax cuts for the rich” are so wrongly maligned – have a look at this blog post: How tax cuts work. [...]
[...] If you want to see a good and funny illustration of why “tax cuts for the rich” are so wrongly maligned – have a look at this blog post: How tax cuts work. [...]
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