## Tuesday, February 26, 2008

### Lunch Room Economics

Suppose that every day ten men go out for lunch and the tab 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 would pay \$7.
The eighth would pay \$12.
The ninth would pay \$18.
The tenth man (the richest) would pay \$59.
All for the same meal.

So, that's what they decided to do. The ten men ate lunch every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. He said, "Since you are all such good customers, I'm going to reduce the cost of your daily lunches by \$20. Food for the ten will now cost just \$80."

The group still wanted to pay their bill the same way we pay our taxes, so the first four men were unaffected. They would still eat for free. But what about the other six men -- the actual 'paying' customers? How could they divide the \$20 windfall so that everyone would get his "fair share"? They 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 his lunch. So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same formula based on what was paid, and he proceeded to work out the amounts each should pay!

And so: The first four continued to eat lunch for free (no change)
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 pay \$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 \$50 instead of \$59 (15% savings).

Each of the six who had been paying was now better off than before, and they all still ate the same meal. But once outside the restaurant, the men began to compare their savings. "I only got a dollar back out of the \$20 savings," declared the sixth man. He pointed to the tenth man, "but he got \$9"! "Yeah, that's right,' exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got back nine times more than I!" "That's true!!"shouted the seventh man. "Why should he get \$9 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. This payment system exploits the poor!"

So the nine men surrounded the tenth guy and beat him up. The next day the tenth man didn't show up for lunch, but the other men sat down and ate without him, anyway. When it came time to pay the bill, they discovered something interesting. Between them all they didn't even have enough money to pay half the bill!

And that, boys and girls, presidential candidates and economic pundits, 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 or attack them for being wealthy and they might not show up to eat with us any more. In fact, they could start eating lunch some other place where the atmosphere turns out to be a lot friendlier.