LUNCH ANYONE?
A friend of mine sent me this by e-mail and I would like to thank the unknown writer. This is the best explanation why progressive taxes, especially for the “rich” people won’t work. It is so easy to understand, that even the worse brain death “Left Winger” or Socialist, Marxist, Communist or – as they now like to call themselves “Progressives” can understand it.
Suppose that every day ten men go out for lunch and the tab 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.
All for the same meal.
So, that’s what they decided to do. The ten men ate lunch 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 cost of your daily lunches by $20. Food for the ten will now cost just $80.”
The group still wanted to pay their bill the same way we pay our taxes, so the first four men were unaffected. They would still eat for free. But what about the other six men — the actual ‘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 his lunch. So the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same formula based on what was paid, and he proceeded to work out the amounts each should pay!
And so: The first four continued to eat lunch for free (no change)
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 who had been paying was now better off than before, and they all still ate the same meal. But once outside the restaurant, the men began to compare their savings. “I only got a dollar back out of the $20 savings,” 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 back 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. This payment system exploits the poor!”So the nine men surrounded the tenth guy and beat him up. The next day the tenth man didn’t show up for lunch, but the other men sat down and ate without him, anyway. When it came time to pay the bill, they discovered something interesting. Between them all they didn’t even have enough money to pay half the bill!
And that, boys and girls, presidential candidates and economic pundits, 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 or attack them for being wealthy and they might not show up to eat with us anymore. In fact, they could start eating lunch some other place where the atmosphere turns out to be a lot friendlier.
July 26th, 2009 at 2:32 pm
Your example is wholly inaccurate. I don’t know how the taxation system works in Austria (or East Germany), Harald, but your depiction of how it operates here is completely wrong.
For starters, the federal government doesn’t tax “wealth”. The federal income tax actually taxes “income”. This is an important distinction, as one who is already “rich” but doesn’t work doesn’t pay any federal income taxes during the periods that they don’t work. Secondly, it assumes that the only tax system in the entire country is that of the Federal Income Tax. In fact, there are as many as two, three or four income taxation districts depending upon one’s place of residence and/or employment. Additionally, there are a number of sales tax and excise tax systems in place, as well as property taxes, fees, and penalties.
The majority of tax systems in this country are designed to tax transactions, as the theory is that the policies enacted by the country are designed to help support and nurture an economic system where people perform transactions with other people. The tax money paid is considered the “fee” to pay for the overhead and security/insurance enjoyed by the participants in a transaction. These supporting things are institutions such as an FDIC or NCUA, a standing military, many other regulatory bodies that help to ensure that one participant cannot be misrepresenting their claims about whatever it is that they are trading. These provisions are also paying for road (and other transit) networks, which very likely helped to bring the players in a transaction together (such as a commuter and their employer, or a contractor and their job sites). The only real “wealth tax” we have in the system is a tax on personal property, mostly homes, but in some states they tax expensive possessions, automobiles, boats, and other vehicles.
Getting back to your example, and sticking to your federal income tax argument, it presupposes that those eating lunch together are already “wealthy” or “poor”, a concept which is tangent to the federal income tax policies. The tax policy operates on income, without regard to existing wealth. Additionally, the tax structure was designed around a principle called “average cost of living”, which is designed to exclude from taxation the portion of the taxpayers’ income that would be used to pay for living expenses. One of these expenses is eating lunch almost every day.
So, your example needs to include daily income as well as daily expense (for now, we could limit it to your simplified “lunch” example):
Person 1: $5/day, $0/lunch (net $5/day)
Person 2: $10/day, $0/lunch (net $10/day)
Person 3: $15/day, $0/lunch (net $15/day)
Person 4: $20/day, $0/lunch (net $20/day)
Person 5: $40/day, $1/lunch (net $39/day)
Person 6: $90/day, $3/lunch (net $87/day)
Person 7: $219/day, $7/lunch (net $212/day)
Person 8: $465/day, $12/lunch (net $463/day)
Person 9: $1013/day, $18/lunch (net $995/day)
Person 10: $2740/day, $59/lunch (net $2681/day)
Not a single person is losing out significantly such that it reduces their income below a lower income amount. In fact, every income ratio is earning more than twice that of the preceding one, save for #5 who is only $1 shy of twice the preceding income level.
If any one of these people wants to argue that they are somehow discouraged so much that they’ll refuse to achieve the next income level, I’d like to hear their reasoning. I see absolutely no credibility in the argument that Person #10 is so horribly punished by the $59 lunch that they would gladly give up nearly 63% of their income just so that they could have that “cheap” $18 lunch, or even more just to get “free” lunch. That is, unless Person 10 wishes to go on vacation or write their memoirs for the next three years. Then, they would be entitled to that free lunch (as they would have no income) and they could live off of savings.
Were the cost of the lunches to be fixed at $10 per person (your suggested “fair share” system), person 1, 2, 3, and 4 probably wouldn’t even be able to eat lunch every day, or at least not at the same table as the other six. This would leave the other six to pay $6.67 more for each of their lunches. The net result of this is that Person 9 and Person 10 save money, while the eight other people in the list eat a much more expensive lunch. Person 9 would merely enjoy savings of about 7.3% per lunch. Person 5 would probably also have a relatively difficult time ordering lunch every day.
With 40%-50% (and maybe as much as 80%) of their workload gone, the lunch restaurant doesn’t need as many employees to work. They are able to translate their new-found “efficiency” into job cuts for “unnecessary” staff, and produce higher revenues for the remaining staff. This “creates wealth” in the libertarian sense of the term (by making some people earn more under the model), yet the net result is less people affording to eat lunch, less people working to make lunch, yet no reduction in the number of people that really need to eat lunch. The demand for lunch remains high, while the supply of lunch remains low, since Lunch Places have figured out that they can pocket more profits under this “fair share” model. However, less jobs are necessary to achieve the end-goal of giving people money for services rendered. Additionally, the four people who don’t get to sit at the table with the other five now likely spend time preparing their own lunch prior to eating it. Their workload has increased. Another consequence of the system is that Person 9 & 10, when/if they decide to stop working, or focus on building a new business, must choose between digging into their savings to pay for this lunch. Whether this fact is inherently “unfair” is also arguable, but the current “progressive” system offers rewards for what is ostensibly argued by the libertarian-leaning community for “hard work” (if you want to actually argue that Person 9 and Person 10 are working “harder” than the other eight people).
Person 9 and Person 10 get taxed higher on their incomes when they were profiting greatly, with the security that they will not be required to pay taxes at that level for the years that they have less income. Person 9 and Person 10 are still rich, they haven’t suddenly lost the volume of their savings. In this case, the “rich” and “super rich” can afford to live, tax light, while still remaining rich, if they had been saving their money.
The other downside, of course, was that Person 1-4 weren’t able to share the table with the others. The higher income lunchers aren’t able to share (teach) their advice of success to four of their friends who they might have been eating lunch with. At least, not over the same lunch.
August 28th, 2009 at 5:34 pm
Nearly two-thirds of U.S. companies and 68% of foreign corporations do not pay federal income taxes, according to a congressional report released Tuesday.
The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no income taxes – despite having a combined $2.5 trillion in revenue.