Friday, March 3, 2006

How Income Taxes REALLY Work!

First, let me say that I did not write this, I did not compose this, and I don't know who did. I have received it at least twice, possibly three times, by e-mail. It has been attributed to two different college professors, and both of them deny authorship. So, it would seem that nobody knows who the author is, except the author!

Regardless of who wrote it, it is one of the best explanations of how taxes really work I have ever seen. So, take a few moments, relax, and enjoy. But, be mindful of the lesson contained within:

This is a good explanation of how income taxes really works!!

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, I hope the following will help. Please read it carefully.

Let's put tax cuts in terms everyone can understand.

Suppose that every day, ten men go out for dinner and 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 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 would still eat 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 (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 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 $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 two? 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)

Something to think about between now and the 15th of April!

Longstreet

9 comments:

  1. Pedantic. This example is quite poor in every respect. First of all, the very wealthy do not really mingle or care about the rest of us at all. All they are concered about is increasing profits and reducing taxes. Anything that interferes with that, such as providing a living wage for American workers, is systematically eliminated.

    If rich people and corporations try to take their money offshore, then we need a Congress and a President with enough backbone to pass laws to prevent that. The current tax code is a failure of leadership on every possible level.

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  2. Sir, madam, you missed the point , entirely! Are your class envy blinders so thick that you cannot see past your bias toward those more well off than most?

    I don't know what part of the world you hail from, but, I'm one of the good ole Southern boys who thinks nothing of having breakfast with millionaires and go straight form there to shop at K-Mart or Wal-Mart. I have never bought into the "Class Thing".

    The lesson is quite clear: The rich more than pay their way. And, they make it possible for so many more to make their way financially, as well.

    Ever hear of a poor person building a company and providing jobs for a few thousand people? It doesn't happen.

    "Pedantic" the little story may be, but it is a parable! A story with a message... and you sir, or madam, missed it entirely.

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  3. Anonymous certainly missed the whole point. A tax cut across the board means that those who already pay the most taxes will receieve more of a cut in terms of $$ that those who pay less taxes. Also, those who are at or below the poverty level pay no income taxes to begin with. The top 10% pay 66% of the taxes.

    Also, the problem isn't with "rich" people getting tax cuts. The problem is with a growing government and an IRS with a tax code that should be unconstitutional. Americans have to work 5 months each year just to cover taxes. That in itself should be considered rape.

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  4. It is not a parable as you state, but rather it is a riddle.

    The original cost of the meal was $100. After the reduction to $80, the ten men "saved" $20 in the aggregate, i.e., 1, 2, 3, 4 and 10 dollars in savings to the 5 wealthiest.

    But, when you add up the cost that the men paid for the dinner, i.e., 2, 5, 9, 14 and 49, they paid $79 for the meal.

    Where did the missing dollar go???

    This is a take off of an old riddle: 3 men go to rent a room. The hotel charges them $30. So, each man paid $10 each.

    After they got to their room, the hotel realized they overcharged the men; the cost should have been $25. A bellhop was given $5 to give to the men. On his way to the room, he realized that he could not break $5 dollars evenly.

    When he knocked on the door, he informed them that they were overcharged and he gave them $3, keeping $2 for himself.

    So, each man paid $9 for his share of the room ($10 - $1), and the bellhop pocketed $2. 3 times 9 = 27 + 2 = 29.

    Where is the missing dollar???

    It seems, Sir, that you missed the point as well.

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  5. Veritas: I'm familar with the riddle you mention. But that was not the POINT of this story. Had I been after the missing one dollar I would have framed it in the form of a question.

    Does anyone, other than Nick, understand the capitalist economic system?

    I guess this little exercise in general US economics was just too difficult for graduates of the "Government" school system.

    My congratulations to Nick!

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  6. Your story is not a valid metaphor. The "meal" symbolizes, or assumes, that each man lives a similar lifestyle. It's all about money at it's core. Using a story that starts out with each man enjoying the same meal (i.e. life) misses the point.

    For the story to make sense, the 6 men that eat together in the restaurant would have to earn between $18,000 and $250,000, and the four that paid no taxes would have to be the homeless men out front that get charity from the cook.

    For God's sake, THINK.

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  7. Perhaps this "little exercise" is too difficult for graduates of some "Government" school systems, and I hope that you are not by implication suggesting that you are a graduate of an Ivy League school--at least for its sake. Assuming arguendo that you are not too ignorant and/or blinded by your own sense of importance to recognize that which stares you in the face, perhaps you should read it again. It is not as if you thought about it, wrote it and then shared with the rest of the world YOUR wisdom.

    You post an obscure writing by an unknown author and get upset when someone offers a different, but correct, interpretation? And to have the unmitigated gall to patronize me for your lack of comprehension makes you out to be no more than an old, ornery, sorry excuse for a blogger.

    The point of the story was to make a fool out of anyone who believed it because the tax structure was erroneously skewed, as well as the percentage of poor to middle class to wealthy. The fact that you want to make more out of it than there is for your own purposes does not make it any truer, nor does it make your position any stronger.

    I would love to explain the article in greater detail, but by your initial response to me I surmise that you are too arrogant, pompous and inept to understand anything further that I may care to share. I thought that wisdom came with age; I guess you proved that wrong.

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  8. Did the professors also state that federal Taxes are outlawed in the Constitution, which is why Great Britian was fought against by the Colonists? Boston Tea Party. We fled Europe to escape taxes. Local taxes are fine, to fund local government programs. Federal taxes are actually against the law, however, 'we' accept this intrusion.

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  9. My, My, My! Touchy, aren't we!?

    Thanks, for making my point. You demonstrated, in an extremely short time, how the liberal mind works.

    There is simply no reaching you.

    You insist on missing the point of the story and get upset when someone points that out. So very typical of the Left.

    I do not have time for this. My patience has nearly run out with the entire American Left.

    I'm glad you stopped by but, please, don't hurry back. You will find the door to this blog closed to you.

    Good day.

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