I am sure you have or will see this chain letter at some point in your life. Its a dumbed down version of how the US tax system supposedly works. Here is the way most people saw it:
Understanding the Tax System:
This is a VERY simple way to understand the tax laws.
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.
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 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 "fairshare?" 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 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. He 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 something important. They're $52 short! 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.
Here are the problems with this low brow nonsense:
1.The top tax rate is now only 35%, not 59%
2. The guy who paid 59 % of the meal was eating lobster and drinking Chimay, the 4 guys who ate for free had PBR's and a burrito, I'm not saying that isn’t still a good deal but we all know that looking at what everyone paid, the free guys weren’t eating the same stuff as the guy paying $59.
3. The poor guys in this story still pay taxes; They pay sales taxes, gas taxes, cigarette taxes, liquor, real estate(if they own it), phone tax, utility taxes, etc.
4. During WW11 and through the Korean War and into the 60s, the top tax rate was over 90% and the economy didn't collapse (just the opposite), rich people didn't quit the work force and retire or move to Mexico. To say we can't tax rich people because they will stop working or leave the country is ridiculous. Of course, one of the reasons why personal income taxes are so high is because corporations, the ones the 10th guy works for, incorporates their businesses in the UAE and the Cayman Islands. These situations came about when we started taxing corporations less, not more and of course when Reagan made it easier to companies to exploit tax loop holes.
5. The guy who paid 59% also probably paid the owner off under the table, or "invested" in the restaurant (perhaps similar to donating to an election campaign) and therefore expected something in return when he ate at the restaurant which was one of the reasons he got the 20% discount in the first place. Sure other people benefited as well, but who benefited the most?
6. The restaurant who gave that discount probably had a good year and or had a decrease in price of expenses and therefore made a wise decision to reward faithful customers when they could afford to. Due to war and military contractors, no costs have gone down for the US. In fact we have one of the largest deficits in history. Last time we were spending money on a war that lasted for over 3 years that’s when the top 1% paid a 91% tax rate. We actually won those wars.
7. The aforementioned Deficit weakens the value of the US dollar thus making imports from Mexico and other countries more expensive. That expensive produce, the electronics, auto parts etc. don’t affect the bottom line of rich people who buy them (besides maybe French and Italian wines and Bently's) but add up to a family that is scraping by.
8. Tax cuts, or at least Republican tax cuts, don't work like they do in this story. There isn't a number out there which is then divided between us all. First of all, the story should have started with the owner saying I am going to give you a percentage discount, not a dollar amount discount. In that case, if he was using Bush's tax model the middle guys would get a 4% decline (as opposed to a 100% decline) in their price while the richest guy would get a 19% decline in his price instead of the 12% described in the story. That's how taxes really work, it's not an equal decline in everyone's taxes like the story would suggest. The ones who make and paid the most not only save the most money because its a larger number but they also get a bigger percentage discount than the person trying to figure out how to pay for their kids college. That is what isn't fair about the Bush tax cuts, not only is it not an equal dollar amount (which is fine) but it's not even an equal percentage decrease.
9. That being said, the Bush tax cuts don't really work like that either. The story would be more accurate by saying the guy who pays more gets more in tax cut savings but not only that, the owner would have also given the top payer (or anyone who drives a luxury car for instance) free valet parking and desert while the other 9 guys still had to pay for parking and then walk to the rest of the way to the restaurant and only received a mint at the end. Oh, and in order to give the rich guy free valet service, the owner had to take the forks and eating utensils from away from the 4 poorest guys and served their dinners on dirty plates and wouldn't give them a doggy bag for leftovers for their children.
10. Besides, if the 10th guy left, the bill wouldn't be the same for 9 guys eating burritos as it would for 10 guys. In fact, without his lobster, Valet parking, expectations, etc., the bill would be much lower.