The author of this piece is unknown, and it has been in circulation for a while, although the story changes a bit. But in order for the numbers to work out, this ?event? would have likely taken place in 1994, the last year when the richest 10% of taxpayers paid 59% of the income tax?or 59 out of every 100 dollars collected by the federal income tax. Today, the richest 10% pay 68% of the income tax.
Furthermore, in the story, the author assumes that the poorest half?the first five of the ten men?pay merely 1% of federal income taxes, when the bottom half pays 3%. So the numbers don?t quite jibe. But as Dan Rather might put it, the story is ?essentially accurate.?
How Tax Cuts Work?
Let's put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for beer. 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 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."
So now drinks 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 drink 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 drink their beer.
So the bar owner suggested that it would be fair to reduce each man's bill by roughly the same portion, 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 (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 eat for free. But once outside the bar, 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 me!"
"That's true!!" shouted the seventh man. "Why should he get $10 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 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 bar anymore. In fact, they might start drinking somewhere overseas.
