A great taxation analogy and a great taxation theory

I don't usually quote the work of others as a whole, but the following seems to have gone out in an email form and a blog called Matt's Commentary posted it from the email he received. The author is unknown, but the analogy is so good it must be shown in full. Here it is:

How our Tax System works when taxes are reduced: Is it only a tax cut for the rich? Try to understand the real world economics of a tax cut. Suppose that every day, ten men go out for dinner and the bill for all 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.
Ø The fifth would pay $1
Ø The sixth would pay $3.
Ø The seventh would pay $7.
Ø The eighth would pay $12
Ø The ninth would pay $18.
Ø The tenth man (the richest) would pay $59.

So that's what they decided to do.

The ten men ate dinner in the restaurant everyday 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." Dinner for the ten 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 eat for free. But what about the other six men - the 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 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:
Ø The fifth man, like the first four, now paid nothing (100% savings).
Ø The sixth now paid $2 instead of $3 (33% savings).
Ø The seventh now paid $5 instead of $7 (28% savings).
Ø The eighth now paid $9 instead of $12 (25% savings).
Ø The ninth now paid $14 instead of $18 (22% savings).
Ø 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 anymore, in fact they might start eating overseas where the atmosphere is somewhat friendlier.

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That is a very powerful analogy. My thanks to the author, whoever he may be. There is another author that also deserves some respect regarding his writings on taxation. Arthur B. Laffer is the author of the Laffer Curve. Here is a link to a column he wrote devoted to his famous theory. It shows the history of the Laffer Curve, basic points of the theory, a nice picture showing the curve and some graphs showing how history has proven it to be right.

The theory points out that there are two ways a government would collect zero taxes. 1) If the tax rate were 0% 2) If the tax rate were 100%. For liberals that don't understand why money would not be flowing in if the tax rate were 100%; Hint: would you work for free? Neither would I. The theory then graphs a curve the looks like an upside down letter 'U' that points out that the same amount of revenue can come in at lower tax rates as high tax rates. Also, if the tax rate is so very high that it discourages participation more revenue can come in with lower tax rates.

Laffer describes the effects of the Kennedy tax cuts:

Using the Kennedy tax cuts of the mid-1960s as our example, it is easy to show that identical percentage tax cuts, when and where tax rates are high, are far larger than when and where tax rates are low. When President John F. Kennedy took office in 1961, the highest federal marginal tax rate was 91 percent and the lowest was 20 percent.

...

By 1965, after the Kennedy tax cuts were fully effective, the highest federal marginal tax rate had been lowered to 70 percent (a drop of 23 percent--or 21 percentage points on a base of 91 percent) and the lowest tax rate was dropped to 14 percent (30 percent lower).
...
In the four years prior to the 1965 tax-rate cuts, federal government income tax revenue--adjusted for inflation--increased at an average annual rate of 2.1 percent, while total government income tax revenue (federal plus state and local) increased by 2.6 percent per year (See Table 4). In the four years following the tax cut, federal government income tax revenue increased by 8.6 percent annually and total government income tax revenue increased by 9.0 percent annually. Government income tax revenue not only increased in the years following the tax cut, it increased at a much faster rate.

Laffer also shows the clear affects of the capital gains hike and cut in '86 and '97:

As expected, increasing the capital gains tax rate from 20 percent to 28 percent in 1986 led to a surge in revenues prior to the increase ($328 billion in 1986) and a collapse in revenues after the increase took effect ($112 billion in 1991).

Reducing the capital gains tax rate from 28 percent back to 20 percent in 1997 was an unqualified success, and every claim made by the critics was wrong.

Can you say surplus? Laffer even shows how the Laffer Curve is shown at the state level and even globally. He first points out the sad but consistent saga of countries with high tax rates:

For all the brouhaha surrounding the Maastricht Treaty, budget deficits, and the like, it is revealing--to say the least--that G-12 countries with the highest tax rates have as many, if not more, fiscal problems (deficits) than the countries with lower tax rates

He then uses Ireland as an example of lowering tax rates resulting in significantly higher revenues. He even throws in a bonus when it comes to Russia by combining the topic with the "Flat Tax":

Russia has become one of the latest Eastern Bloc countries to institute a flat tax. Since the advent of the 13 percent flat personal tax (on January 1, 2001) and the 24 percent corporate tax (on January 1, 2002), the Russian economy has had amazing results. Tax revenue in Russia has increased dramatically

With all of this evidence, why are we still smacked in the face by liberals and the media with disdainful terms such as "Trickle Down Economics" and "Voodoo Economics"? The Laffer curve has proven itself again and again. Yet liberals resist it because 1) It deprives them of the power to socially re-engineer society and 2) It inevitably makes the rich richer, which seems to be a crime against humanity even if the middle class and lower class also do better.

Perhaps it is the name of the theory that people have trouble taking seriously. The fact is that the huge increases in revenue for the Federal US government, US States and other countries who have followed the curve is no "laffing" matter. The people of this country need to understand taxation. Taxation is such a lynch-pin of socialist thinking that to the hard leftists it is non-negotiable. If they admit the dramatic results of the Laffer Curve Theory put into practice, they lose power and influence. That cannot be tolerated by the champions of tolerance.