Understanding the US Tax System
Here is one of the best stories I've seen that explains how the US tax system and tax cuts work, enjoy!
I was having lunch with one of my favorite clients last week and the
conversation turned to the governments recent round of tax cuts. "I
am opposed to those tax cuts", a retired college instructor declared,
"because they benefit the rich. The rich get much more money back
than ordinary taxpayers like you and me, and that is not fair."
"But the rich pay more in the first place," I argued, "so it stands to
reason that they would get more money back." I could tell that my
friend was unimpressed by this meager argument. So I said to him, "lets put tax cuts in terms everyone can understand.
Suppose that every day 10 men go to a restaurant for dinner. The bill
for all ten comes to $100. If it was paid the way we pay our taxes, the
first four men 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.
The 10 men ate dinner in the restaurant every day and seemed quite
happy with the arrangement until the owner threw them a curve. 'Since you
are all such good customers,' he said, 'I am going to reduce the cost of
your daily meal by $20. Now dinner for the 10 only costs $80.' (Tax cut)
The first four are unaffected. They still eat for free. Can you
figure out how to divvy up the $20 savings among the remaining six so that
everyone gets his fair share? The men realize that $20 divided by 6 is $3.33,
but if they subtract that from everybody's share, then the fifth man and the
sixth man would end up being paid to eat their meal.
The restaurant owner suggested that it would be fair to reduce each
man's bill by roughly the same percentage, being sure to give each a break,
and he proceeded to work out the amounts each should pay. Now, the fifth man
paid nothing, the sixth paid $2, the seventh paid $5, the eighth paid
$9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of
Outside the restaurant, the men began to compare their savings. "I only
got a dollar out of the $20," complained the sixth man, pointing to
the tenth, "and he got $7."
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar,
Its 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. When it came time to pay the bill, they discovered
they were $52 short!
And that, boys, girls and college instructors, is how Americas 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 any more; or maybe move to a better restaurant.