(this may have been posted before, worth a repost even if it has...)
This is not even hypothetical nowadays:
Suppose that everyday, 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. He said, "Since you are all such good customers, I'm going to reduce the
daily cost of your beer by $20. Drinks for the ten of you now will only 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 $50 instead of $59 (15% 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 $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 I!"
"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 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 among 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 any more. In fact, they might start drinking overseas where the
atmosphere is somewhat friendlier.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
