The Pearls of Wisdom I share are generally short and to the point. My goal, since starting this blog, has always been to quickly share priceless gems of information you can use and apply immediately. This Pearl, by its very nature, has to be long. We are in an election year and there is a lot of talk across the aisles about restructuring our tax codes. Hope this is of value.
Not long ago ten boys graduated from high school; all ten applied for jobs at the local mill. As luck would have it, the boys all qualified for different jobs. Their jobs ranged from custodian to sales, to marketing and machinists. Each was paid a different wage rate.
The years at the mill flew by, yet their friendship remained strong. When they turned 21, they began to meet on Thursday nights at a local bar after work. They would talk about the old high school days, discuss how their families were doing, and sip on several drinks. When the night ended, their bar tab was typically $100.
Since there was such a difference in their pay, they came up with a plan to pay their tab. The first four men (the lowest paid) contributed nothing. The fifth man put in a $1 while the sixth man chipped in $3. The seventh laid down $7 and the eighth tossed in $12. The ninth kicked in $18 and the tenth man (the highest paid) coughed up the remaining $59.
For over two years, the men used this arrangement to pay their bar tab and all seemed okay. Then one week the bar owner threw them a curve. He came to their table and said, “You boys are wonderful customers; from now on I’m going to reduce the cost of your bar tab by $20. When you guys come in on Thursday nights from now on, you will only have to pay $80 instead of the regular $100."
Delighted that the owner was going to reduce their burden, the buddies agreed to still pay their bar tab on a sliding scale. The six payers had to decide how to divide up this $20 reduction? If they divided the $20 equally by six, that would mean a $3.33 savings per man; however, when they went to subtract the $3.33 from their shares, the fifth and sixth both received money and that just didn’t seem fair.
Seeing their dilemma he caused, the bar owner suggested they reduce their shares using the principles the federal government applies to income taxes. The men agreed and the bar owner calculated what each man’s new fair share would be.
According to his calculations, the fifth man, like the first four, would now pay nothing (a 100% savings). The sixth man would now only pay $2 instead of $3 (a 33% saving). The seventh man would now only pay $5 instead of $7 (a 28% saving) and the eighth would now kick in $9 instead of $12 (a 25% saving). The ninth man was asked to contribute $14 instead of $18 (a 22% saving) and the tenth man would now only be responsible for $49 instead of $59 (a 16% saving).
Proud of his solution, the bar owner smiled as he believed the ten men were now better off than before.
The men settled their tab using the new system and then left the bar. Once outside they began to compare their savings. “Damn, I only got one dollar out of the $20,” declared the sixth man!” He then pointed to the tenth man and said, "but you got a $10 savings!”
“That’s right,” exclaimed the fifth man. “I too only save a dollar; it isn’t fair he gets a benefit ten times more than me!”
“That’s true!” shouted the seventh man. “Why should he get $10 back, when I only get $2? I guess it’s true what they say the wealthiest always get all the breaks!”
Just then the first four men yelled out in unison, “Why are you guys complaining? Look at us; we didn’t get any savings from the $20.00. This system really sucks; we get nothing, he gets $10 and you all get something - we are the only ones here being exploited!” The nine men were now so worked up and irate that they surrounded the tenth man and beat him up and left him lying in the street as they walked home.
The following Thursday night, the tenth man did not show up; however, the other nine men met as usual. They talked about the old high school days, discussed how their families were doing and had several drinks. As the night came to an end, the bar owner came over with their $80 bar tab. Within a few minutes the men realized they did not have enough money among the nine of them to cover even half the bill.
And that my friends is the problem we face when someone announces they want to fix our federal tax system and reduce our taxes. Invariably, individuals who pay the most in taxes are going to be the ones who get the greatest benefit from any reduction.
If we choose to tax the wealthy extra just for being wealthy they might decide not to show up on Thursday nights. In fact, they might start going overseas where the conversations and the atmosphere is friendlier.
