Income Tax Analogy

This story has been repeated and published many times and places, and I'm not certain where it originated. The closest attributions I've seen are to a Don Dodson from Ft. Worth, Texas or Professor Davies of South Dakota Business School.

Regardless of the source, it's a great analogy about our current Federal Income Tax system.

10 men decided to have a business lunch once a week. They always met in the same restaurant and the bill was always, $100.00, for all 10 men. If each man was responsible for his share of the bill, each would pay $10.00.

The men decided to divide the bill based upon their ability to pay, inspired by the government's progressive approach to collecting income taxes. The formula they eventually agreed upon included the following payment arrangement.

Man #1, #2, #3, and #4 paid nothing.

Man #5 paid $1.

Man #6 paid $3.

Man #7 paid $7.

Man #8 paid $12.

Man #9 paid $18.

Man #10 paid $59.

After a number of weeks of the 10 men reliably frequenting his establishment, the owner of the restaurant decided they deserved a discount. He offered to reduce the total cost of the men's lunch by $20.

This created a bit of a problem among the gentlemen, because the four men who paid nothing felt cheated that they were not sharing in the windfall. The others complained that if the $20 were to be distributed proportionally based upon the amount each paid each week, Man #10 would receive over half of the total discount amount.

So the restaurant owner proposed this solution:

Man #1, #2, #3, and #4 still paid nothing. They were unhappy at being excluded from the benefits of the reduction, but a discount from zero is still, in fact, zero.

Man #5 now also paid nothing. His contribution went from $1 to $0, so he received a 100% discount.

Man #6 now paid $2, receiving a 33% discount.

Man #7 now paid $5, receiving a 28% discount.

Man #8 now paid $9, receiving a 25% discount.

Man #9 now paid $14, receiving a 22% discount.

Man #10 now paid $50, receiving a 15% discount.

So they completed their meal and left the restaurant. Once outside, an argument ensued.

Men #1 through #4 were displeased that everyone else received a benefit except them. Man #5 was upset that he only got $1, while Man #10 got $9. Likewise Man #6. So these men beat up Man #10, took his money and left him bleeding on the sidewalk.

The men returned to the restaurant the following week for lunch, but of course Man #10 was a no-show. So when the bill arrived, the remaining men discovered they couldn't afford to pay even half the bill.

The analogy is a great illustration of today's "Progressive" tax system. Current statistics show that 80% of the tax burden is borne by the wealthiest 20% of the population. When Bush cut income tax rates, he substantially cut them in a similar manner to the restaurant owner in the above story.

Do you think the distribution of the cut was fair? If you think it was unfair, to whom do you believe it was unfair? The Bottom 4, the guys between 5 and 9, or #10? How would you split the bill if the decision were left to your wisdom?

Based on the rhetoric employed on the tax issue today, the Democrats are represented in the story as Man #1 through #6. Man #10 didn't want to get beaten again, so his decision not to show up the next week is analogous to him moving his companies offshore, presumably where he would not be beaten to a pulp.

So those first 5 or 6 are now in charge of the country. As far as I can tell, they already have their clubs, bats, and brass knuckles out and have started swinging. Care to guess what will happen next?