How tax cuts work-Unproven!

"How Tax Cuts Work"-Unproven!

Summary of the eRumor
This is an attempt to use a story to try to explain the complexity of taxes and tax cuts.

The Truth
The biggest question about this eRumor is not so much whether it's an accurate picture of taxation as to who actually wrote it.

The most recent version that has circulated on the Internet attributes it to David R. Kamerschen, a professor of Economics at the University of Georgia.
On his web site, however, he denies that he wrote it and says he doesn't know who did.
How his name got attached to it, he does not know.

Different version says it was written by another university professor, T. Davies of the University of South Dakota.
He too denies that he wrote it.

So its origins is still a mystery,.

Updated 11/22/04

A real example of the eRumor as it has appeared on the Internet:

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.
* The tenth man (the richest) would pay $59.

So, 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.

"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. 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 each 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, like the first four, now paid
nothing (100% savings).
* The sixth now paid $2 instead of $3 (33% savings).
* The seventh now paid $5 instead of $7 (28%
savings).
* The eighth now paid $9 instead of $12 (25%
savings).
* The ninth now paid $14 instead of $18 (22%
savings).
* The tenth now paid $49 instead of $59 (16%
savings).

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. He pointed to
the tenth man "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.

The next night the tenth man 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
something important. They didn't have enough money
between all of them for
even half of the bill!

And that, boys and girls, journalists and college
professors, is how our 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. There are
lots of good
restaurants in Europe and the Caribbean.

David R. Kamerschen, Ph.D.
Distinguished Professor of Economics
536 Brooks Hall
University of Georgia