How Income Taxes Work..

Discussion in 'General Discussion' started by CRC, Mar 22, 2006.


  1. CRC

    CRC Survivor of Tidal Waves | RIP 7-24-2015 Moderator Emeritus Founding Member

    From a friend..

    Sometimes politicians, journalists and others exclaim; "It's just a tax cut for the rich!" and it is just accepted to be fact.

    But what does that really mean? Just in case you are not completely clear on this issue, let's put tax cuts in terms everyone can understand.

    Imagine a group of ten men who went out for dinner together and the bill for all ten came 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 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." Dinner for the ten now 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 still ate 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 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, 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 (29% 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 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 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 dinner, so the nine sat down and ate 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 anymore. In fact, they might start eating overseas where the atmosphere is somewhat friendlier.

    Author Unknown
     
  2. ghostrider

    ghostrider Resident Poltergeist Founding Member

    Two things in that the media and politicians ignore, or simply don't understand. When tax rates are too oppressive, people in the higher income brackets will simply forgo raises, spouses working, or another store for a small business owner. The Laffer curve shows that at a 50 % tax rate, further income producing activity declines to nothing at 100 %.

    Even though Bush and the Republican Congress gave across the board tax cuts, they actually get more money from the top five percent of wage earners. The top two percent actually pay more than 30 percent of the income taxes paid.
     
  3. Quigley_Sharps

    Quigley_Sharps The Badministrator Administrator Founding Member

    [bestpost]
     
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