Message Font: Serif | Sans-Serif

No. of Recommendations: 29
If you have any friends or relatives that don't understand how tax cuts
"work" they might benefit from this explanation.

Tax Cuts Explained

Let's put tax cuts in terms that 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.
The tenth man (the richest) would pay \$59.

So, 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.

"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. 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 each 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, like the first four, now paid nothing (100%
savings).
The sixth now paid \$2 instead of \$3 (33% savings).
The seventh now paid \$5 instead of \$7 (29% 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 \$50 instead of \$59 (15% savings).

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. He
pointed to the tenth man "but he got \$9!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a
dollar too. It's unfair that he got nine times more than me!"

"That's true!!" shouted the seventh man. "Why should he get \$9 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 the tenth man 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 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 at the table
anymore. There are lots of good restaurants in Europe and the
Caribbean.

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.