Tax Tips (and other stuff): Hitting the 'rich' with more taxes may not work

Over the years, we have used a handout to help explain to our clients how the current tax system, known as a progressive tax system, works. We got the idea from David R. Kamerschen, Ph.D., an economics professor at the University of Georgia, Athens.

Without further ado, the new revised version:

10 Women Went To Lunch

Suppose that every week, 10 women go out for lunch. The bill for all 10 comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this: The first four ladies (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 10th (the richest) would pay $59.

One day, the restaurant owner threw them a curve.

"You know how tough times are these days?" he said. "Well, I've been giving you all a break on the cost of your daily meal by $20. I can no longer afford to give you that break, so now the lunch for the 10 of you will cost $120."

The group still wanted to pay their bill the way we pay our taxes. So the first four women were unaffected. They would still eat for free. But what about the other six, the paying customers? How could they divvy up the $20 increase so that everyone would pay her fair share? The six ladies realized that $20 divided by six is $3.33. But the majority agreed that due to hard economic times, only the 9th and 10th "rich" ladies should pay the increase. The restaurant owner suggested that it would be fair to increase the last two "rich" ladies' bill by roughly the same percentage as how much of the original bill they paid, and he proceeded to work out the amounts each should pay.

And so: The first eight continue as before. The ninth now pays $23 instead of $18, a 28 percent increase. The 10th now pays $74 instead of $59, a 25 percent increase.

Each of the first eight was no worse off than before. And the first four continued to eat for free. But once outside the restaurant, the 10th lady exclaimed, "I'm getting hit with a downturn in my business due to these hard economic times, I can't afford to pay $74 for lunch! That $15 increase is too much! Sorry, but I can't make it for lunch any longer. In fact, I'm moving to another town where the meals are much less expensive."

The next week the 10th woman didn't show up for lunch, so the nine sat down and ate without her. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for more than half the bill! That, my friends, is what happens when you put all the increase on the "rich" (or on the business owners). They are paying much of the bill now; increase it disproportionally and they may just leave town (or the state).

Margaret Thatcher once said, "The trouble with Socialism is that eventually you run out of other people's money."

• Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459.