How Taxes Work
by Tom Yamachika, President, Tax Foundation Hawaii
This is a thought-provoking piece that appeared on the Internet some years ago. There are variations of this story floating around, and the investigative website snopes.com concluded that the actual author is still unknown.
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 said, “Since you are all such good customers, I'm going to reduce the cost of your daily meal by $20.” So now dinner for the ten only cost $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?
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 owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.
And so the fifth man, like the first four, now paid nothing (100% saving). The sixth now paid $2 instead of $3 (33% saving). The seventh now paid $5 instead of $7 (28% saving). The eighth now paid $9 instead of $12 (25% saving). The ninth now paid $14 instead of $18 (22% saving). The tenth now paid $49 instead of $59 (16% saving). Each of the six was better off than before.
Once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man who pointed to the tenth. "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 $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. Not surprisingly, 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. Their shares added up to less than half the bill!
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 reduction because those who make the most pay most of the tax. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.
In fact, they might start eating overseas, where the atmosphere is somewhat friendlier. Or they might move to another state without income tax, like Nevada.