Don't bite the hand that feeds us

30 Apr 2013

By Shadforth Financial Group

There is a budget and an election campaign coming up. It would serve us well to remember where the money being dished out comes from. There was an article in the Chicago Tribune a number of years ago that is still true today. Our legislators and the voting public often lose sight of where government revenue comes from.

This year there doesn't seem like much chance of a tax cut but there is discussion of finding ways to tax the rich more. The article in the Tribune talked about putting potential tax cuts in terms everyone could understand. It shared a story of how once a month, ten men went out to dinner together and the bill for all ten men came to $300. If they paid their bill the way we pay our taxes it would be paid as follows;

  • the first four men, the poorest, would pay nothing,
  • the fifth would pay $3,
  • the sixth would pay$9,
  • the seventh would pay $21,
  • the eighth would pay $36,
  • the ninth would pay $54,and
  • The tenth man, the richest, would pay $177.

That's what they decided to do. The ten men ate dinner in the restaurant every month and seemed quite happy with the arrangement until one day the owner gave them an unexpected benefit. In tax language he gave them a tax cut. "Since you are all such good customers," he said, "I am going to give you a 20% discount and reduce the cost of your meal by $60."

So now the dinner for the ten men only cost $240. The group still wanted to pay the bill the way we pay our taxes so the first four men continued to eat for free. What about the other six? These were the paying customers and they had to work out how to divide the bill so that everyone would get his "fair share" of the windfall. The six men realised that the $60 divided by six was $10 but if they subtracted that from every ones share then the fifth and sixth men would end up being paid to eat their meal. Therefore the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount. He proceeded to work out what each man should pay. The result was that the fifth man now paid nothing, the sixth put in $6, the seventh put in $15, the eighth put in $27 and the ninth put in $36. This left the tenth man to put in $156 instead of his earlier $177.

Each of the six men was better off than they were before and the first four continued to eat for free. Once outside the restaurant however, they began to compare their savings.

"I only got $3 out of the $60," declared the sixth man, pointing to the tenth. "But he got $21!"

"That's right," exclaimed the fifth man, "I only saved $3 too. It's unfair that he got seven times more than us."

"That's true!" shouted the seventh man. "Why should he get back $21 when I only got back $6? The wealthy get all the benefits!"

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. The system exploits the poor!"

So the nine men surrounded the tenth man and beat him up. The next month he didn't show up for dinner (or in the real world he took his business out of the country). So the nine sat down for dinner and ate without him. When it came time to pay the bill, they discovered too late what was very important. They were $156 short of paying the bill!

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 may just not show up at the table anymore and where will that leave the rest of us? It is a shame this rather straightforward logic doesn't always get through to the electorate.

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