Thursday, December 29, 2005

How Our Taxes Work...

From: "Raju Jairam"
Date: Thu Dec 26, 2002 10:59 am (Message 251)

Subject: How Our Taxes Work...

How Taxes Work....

This is a VERY simple way to understand the tax laws. Read on -- it does make
you think!!

Let's put tax cuts in terms everyone can understand. 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, and
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 (in tax language a tax cut).

"Since you are all such good customers," he said, "I'm going to reduce the
cost of your daily meal by $20." So now dinner for the ten only cost $80.00.

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 "fair share?"

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 bill 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, but he, pointing
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, a little late what was
very important. They were FIFTY-TWO DOLLARS short of paying the bill!

Imagine that!

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.

Where would that leave the rest? Unfortunately, most taxing
authorities anywhere cannot seem to grasp this rather
straightforward logic!

T. Davies Professor of Accounting & Chair,
Division of Accounting and Business Law
The University of South Dakota School of Business
414 E. Clark Street Vermillion, SD 57069
Phone: 605-677-5230
Fax: 605-677-5427