A Lesson in Economics

The following article appeared in the February 23, 2002 issue of the Lakeshore News – Salmon Arm, B.C. It was written by Ron Adams; a local financial advisor who writes a regular column in the paper. Ron is sometimes a little irreverent and ruffles many conservative feathers in town but he is often entertaining and usually gets straight to the heart of the issue.

As written by Ron:

“I was having lunch at PJ’s with one of my favorite clients last week and the conversation turned to the Campbell government’s recent round of tax cuts. “I’m opposed to those tax cuts,” the retired college instructor declared, “Because they benefit the rich. The rich get much more money back than ordinary taxpayers like you and I and that’s not fair.”

“But the rich pay more in the first place,” I argued, “so it stands to reason that they’d get more money back.”

“I could tell that my friend was unimpressed by this meager argument. Even college instructors are a prisoner of the myth that the “rich” somehow get a free ride in Canada. Nothing could be further from the truth.”

“Let’s put tax cuts in terms everyone can understand. Suppose that everyday 10 men go to PJ’s for dinner, the bill for all ten comes to $100. If it were paid the way we pay our taxes, the first four men 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.”

“The 10 men ate dinner in the restaurant every day and seemed quite happy with the arrangement until 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. Now dinner for the 10 only costs $80.”

“The first four are unaffected. They still eat for free. Can you figure out how to divvy up the $20 savings among the remaining six so that everyone gets his fair share? The men realize that $20 divided by 6 is $3.33, but if they subtract that from everybody’s share, then the fifth man and the sixth man would end up being paid to eat their meal.”

“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 paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of $59.”

“Outside the restaurant, the men began to compare their savings. “I only got a dollar out the $20,” declared the sixth man pointing to the tenth, “and he got $7!” “Yeah, that’s right,” exclaimed the fifth man. I only saved a dollar, too. It’s unfair that he got seven times more than me!”

“That’s true,” shouted the seventh man. “Why should he get $7 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 he 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 were $52 short!”

“And that, boys and girls and college instructors, is how the 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 Switzerland and the Caribbean.”

Gerold note – When Western economies drop further in the next “double-dip” we can expect desperate politicians facing re-election to promote “tax the rich” schemes. However, even in the U.S. the rich pay a disproportionate share of taxes. According to Monty Guild “In 2008, the top 1 percent earners paid 38 percent of total federal individual income taxes. The top 5 percent paid over 58 perecent of the total. About 52 million filers paid NO federal income tax and many millions more did not even file a tax return.”
U.S Economy – The Big Picture, Jim Sinclair’s Mineset, April 29, 2011

Disclaimer: I’m not an investment advisor and these articles are for commentary only. For specific financial advice you should consult your own investment professional.

Your comments are WELCOME! Lengthy comments may time-out before you’re finished so consider doing them in a word doc first then copy and paste to “Leave a Reply” below.

About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
This entry was posted in Collapse 2011, Economic Collapse and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s