A Tax Fable

Suppose that every day 10 men go to the Waverly Family Restaurant for lunch. The bill for all ten comes to $100. If it were paid the way we pay our taxes, the first four men (the poor) 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.

The 10 men ate lunch in the restaurant every day and seemed quite happy with the arrangement. The poor ate free, the middle income group paid their share, and the richest paid far more than his share but did it to keep everyone happy. And then 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.”

Now lunch for the 10 would cost only $80. At first everyone seemed pleased. The first four are unaffected. They still eat for free. The problem was figuring out how to divvy up the $20 savings between the remaining six so that everyone gets his fair share. How can this be done? The men realize that the $20 savings divided by the 6 who were paying is $3.33 per man, but if they subtract that from everybody’s share, then the fifth and the sixth man would end up being paid to eat their meal, which seemed ridiculous. The restaurant owner suggested that it would be only fair to reduce each man’s bill by roughly the proportional amount that each previously paid. He pondered a method to determine what each should pay.

After careful thought, he proposed: the fifth man would pay nothing VS the $1 he previously paid, the sixth would pay only $2 VS $3, the seventh would pay $5 VS $7, the eighth would pay $9 VS $12, and the ninth would pay $12 VS $18. That would leave the tenth man with a bill of $52 instead of $59.

Outside the restaurant, the men began to compare their savings, each complaining that he didn’t get enough. “I only got one dollar out of the $20 savings,” declared the fifth man pointing to the tenth (richest) man, “and he got $7!” “Yeah, that’s right,” exclaimed the sixth 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. That $20 savings should be divided between the 4 of us. We should be paid $5 per person to eat. The system exploits the poor.”

Angered by the discussion, the nine men surrounded the rich tenth man and beat him to a bloody pulp. The next day he didn’t show up for lunch, so the nine sat down and ate without him. They rejoiced about how they successfully put him in his place. But when it came time to pay the bill, they discovered something very important. They were $52 short! Now who would pay the bill, and in what percentage? A fight broke out and the restaurant was destroyed, leaving all the employees without a job. Now nobody had any food and 38 people were unemployed.

And that, boys and girls and college instructors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. The top 5% of taxpayers pay over 54% of the income tax. Tax them too much, attack them for being wealthy, keep up the soak the rich mantra and they just may not show up at the table anymore.

There are lots of good restaurants in Switzerland, Australia and the Caribbean. Without them the rest of the people can try to find the capital to start a restaurant (or any other business that has employees).

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NOTES and DISCLAIMERS:

I added the title “A Tax Fable” to this story because I think the word fable aptly describes the story. I am using “fable” in the sense of Aesop’s fables. That is, a story with a moral that teaches an important lesson. I did not write this little fable, and neither did Aesop. I don’t know who did, but it is out there on the Internet and I haven’t seen it attributed to anybody.

I liked it, a lot, so I put it up here. I’ll just assume that this was written by that most famous of all authors “Anonymous.” I should also point out a crucial distinction: When you hear people talk about “tax cuts,” they don’t usually mean cutting the dollars paid by all taxpayers (i.e. government income tax revenue). Instead, they are talking about cutting marginal tax rates.

Much like cutting retail prices can often result in additional revenue, cutting tax rates may result in more total revenue for the government (or at least not as much lost tax revenue as proponents of the so-called “static” models would have you believe).