This is a VERY simple way to understand the tax laws. Read on — it does make you think!!
Let's put tax cuts in terms 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, and the tenth man — the richest — would pay $59.
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 (in tax language a tax cut).
"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 $80.00.
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 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 paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. 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 who pointed to the tenth. "But he got $7!"
"Yeah, that's right," exclaimed the fifth man, "I only saved a dollar, too ... It's 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. But when it came time to pay the bill, they discovered, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!
And that, boys and girls, journalists and college instructors, is how the 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.
Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!
Professor of Accounting & Chair,
Division of Accounting and Business Law
The University of South Dakota
School of Business
414 E. Clark Street
Vermillion, SD 57069
Origins: The only real question to be tackled regarding this humorous parable supposedly
explaining "how taxes really work" is its authorship, and the investigation reveals this item to be one of those favored pieces of writing adopted and reprinted by numerous columnists without their knowing (or necessarily caring) who originally penned it.
The signature block at the bottom of the currently circulating Internet version identifies it as being the work of "T. Davies," a Professor of Accounting at the University of South Dakota. Professor Thomas Davies does indeed teach at USD's School of Business, but when we inquired of him whether he was the originator of this piece, we received the following response:
Thank you for your message. I previously distributed the "How Taxes Really Work" article (as well as other opinion pieces reflecting different perspectives) to my graduate tax class to encourage them to think beyond the rules and regulations. Unfortunately, it is rather easy to focus on the myriad of complex rules and forget that tax policy frequently influences taxpayer behavior beyond what may have been intended. Thus my students are frequently asked to think "outside the box," and consider such topics a tax complexity, alternative forms of taxation, and the impact of taxes on behavior. The article was not written by me, and I have intentionally avoided commenting on its validity in order to encourage my students to think critically, and to assist in the development of their analytical and communication skills. I am unaware of the true author's identity, which is unfortunate, since the piece has generated considerable interest. Unfortunately, one of my students sent it along and erroneously contributed the authorship to me.
Likewise, Dr. David R. Kamerschen, a professor of economics at the University of Georgia, has also been erroneously attributed as the author of this essay. He posted a denial of authorship on his personal web page:
Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics." Additionally, he does NOT know who wrote it.
A similar version was used in a 23 February 2002 column appearing on the web site of Mall Arkey (a Canadian investment firm), but at the very end of the piece the writer indicated he (slightly) rewrote an item that had come to him third-hand:
I got the idea for this allegory and [sic] from an article in The Taxpayer reprinting an article in the Chicago Tribune. It has been rewritten Mall Arkey style.
William F. Buckley Jr. also reprinted and analyzed a version of this piece in his 21 April 2001 column for the National Review, noting only that the "parable just came in from a friend, via the Internet," an act of appropriation that drew a stinging rebuke from The New Republic's Jonathan Chait:
A few weeks ago I came across a column by William F. Buckley in the National Review Online that began: "The following parable just came in from a friend, via the Internet." Buckley then reprinted the parable in toto, some three-hundred-words worth, and then concluded with some commentary of his own. What made this episode so odd was that Buckley apparently hadn't bothered to check out who had written the parable to begin with. (According to my two-minute search of Lexis-Nexis, it was someone named Don Dodson of Fort Worth, Texas, in a letter to the Chicago Tribune.) Now, if somebody e-mailed me one of Bill Buckley's columns, I wouldn't just reprint it as having come in "from the Internet," even if I happened to think it was brilliant (which would be unlikely). But perhaps one of the joys of being William F. Buckley is not having to bother with such basic journalistic steps.
Buckley did, however, place the essay in its correct context as a commentary on the controversial tax cuts then being proposed by newly elected president George W. Bush:
As the parable above informs us, 10 percent of the American people (the tenth dinner guest) pay 59 percent of all the taxes. The lowest 40 percent pay none. The fifth quintile, 1 percent; the 6th, 7th, 8th, and 9th, respectively, 3, 7, 12, and 18 percent of the taxes.
The parable, of course, then brings in the drama: The proposed tax reduction of President Bush would reduce income taxes by a total of 20 percent, and the benefits of that reduction are distributed along the lines suggested for the ten diners.
And yes, the protests arise, reaching maximum volume in the matter of relieving the tenth man from his customary contribution of $59 toward the common meal, lowering it to $52.
Okay, but the drama is then taken to what one might call a fourth act, which is one too many. The tenth diner isn't going to be lynched because his survival is too necessary to the other nine diners. What they will do is attempt to diminish the reduction in his allocation of his benefits from the reduced dinner price and spread it among themselves. They'd like to see the tenth man continue to pay 59 percent of all taxes.
That way it doesn't hurt. Ah, but the parable writer obviously believes that it would hurt, in the long run. Because if that tenth diner tires, or is crushed into diminished productivity, he won't have the $59 to contribute to the pool, and that would be very, very inconvenient. Perhaps even life-threatening. If the restaurant has to go without that critical subsidy from the tenth diner, it might just have to reduce the rations paid out.
Granted, if the parable were refined even further, it would have to ask: What was it that caused the tenth man to be so obliging in the first place? Were they threatening to lynch him if he didn't put out? Did the tenth man plot to protect himself? Was he the critical voter in Florida in November 2000?
As both the Mall Arkey and New Republic articles noted, the "How Taxes Work" piece was published (in shorter form) in the letters column of the Chicago Tribune on 4 March 2001, submitted by one Don Dodson:
Every night, 10 men met at a restaurant for dinner. At the end of the meal, the bill would arrive. They owed $100 for the food that they shared.
Every night they lined up in the same order at the cash register. The first four men paid nothing at all. The fifth, grumbling about the unfairness of the situation, paid $1. The sixth man, feeling very generous, paid $3. The next three men paid $7, $12 and $18, respectively.
The last man was required to pay the remaining balance, $59. He realized that he was forced to pay for not only his own meal but the unpaid balance left by the first five men.
The 10 men were quite settled into their routine when the restaurant threw them into chaos by announcing that it was cutting its prices.
Now dinner for the 10 men would only cost $80. This clearly would not affect the first four men. They still ate for free. The fifth and sixth men both claimed their piece of the $20 right away. The fifth decided to forgo his $1 contribution. The sixth pitched in $2. The seventh man deducted $2 from his usual payment and paid $5. The eighth man paid $9. The ninth man paid $12, leaving the last man with a bill of $52.
Outside of the restaurant, the men began to compare their savings, and angry outbursts began to erupt.
The sixth man yelled, "I only got $1 out of the $20, and he got $7," pointing at the last man.
The fifth man joined in. "Yeah! I only got $1 too. It is unfair that he got seven times more than me."
The seventh man cried, "Why should he get $7 back when I only got $2?"
The nine men formed an outraged mob, surrounding the 10th man.
The first four men followed the lead of the others: "We didn't get any of the $20. Where is our share?"
The nine angry men carried the 10th man up to the top of a hill and lynched him.
The next night, the nine remaining men met at the restaurant for dinner.
But when the bill came, there was no one to pay it.
The Chicago Tribune version included no additional information about the item, however, not even an indication that the submitter claimed to be its author. Given that readers frequently send non-original items to newspapers as "letters" (an apocryphal item about President Clinton was published under at least four different names, for example), newspaper publication is not a reliable indicator of authorship.