President Trump and congress have stated that one of the next major issues on their agenda, which they will begin working on in 2017, will be tax reform.
Now I don't necessarily believe they will be any more successful with this exceptionally difficult endeavor than they were with repealing and replacing Obamacare. After all, the GOP senators had already voted to repeal the inaccurately named Affordable Care Act multiple times when it didn't matter and had no chance of actually being repealed when President Obama was in office. Of course they refused to cast that same vote when President Trump would have signed the bill. Why would we believe that these integrity-challenged charlatans would be willing to expend political capital to fix our broken tax code next?
Regardless, we can hope that these cowardly and incompetent people that populate our House of Representatives and Senate might overachieve just once in their careers and actually be able to enact meaningful tax reform.
Of course any tax reform that doesn't raise taxes on the "evil rich" will immediately be vehemently decried by some of our fellow Americans as being grossly unfair and exploitive of the poorest amongst us. It is nonsense, as the poor do not pay federal income taxes currently and surely won't in the future, but mark my words that the cacophony of demonization will happen as surely as President Trump will continue his incessant "tweeting".
With all of this being said, a friend of mine recently forwarded this simplified explanation of how our progressive tax system functions, and the likely results of that reform being excoriated by the ignorant and ideologically partisan pundits and politicians when and if actual tax reform does come to fruition. Enjoy!
Suppose that every day, ten men go out for beer and 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 would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.
“Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten men would now cost just $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 drink for free. But what about the other six men?
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 every body's share, then the fifth man and the sixth man would each end up being paid to drink their beer.
So, the bar 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.
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 (29% 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 (17% saving).
Each of the six was better off than before and the first four continued to drink for free.
But, once outside the bar, the men began to compare their savings. "I only got a dollar out of the $20 saving," 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 received ten times more benefit 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. This new tax 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 drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important…they didn't have enough money among all of them for even half of the bill!
And that, boys and girls, journalists, politicians, and pundits is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore.
In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.