How Taxes Work — or, ‘How to Pay for Beer’ 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. ‘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 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 - 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 drink his beer. So, the bar 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, 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 $49 instead of $59 (16% savings). Each of the six was better off than before. And the first four continued to drink 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. Then he pointed at 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 I!’ ‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? 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 drinks, so the nine sat down and had beers 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, 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 drinking overseas where the atmosphere is somewhat friendlier. Written by David R. Kamerschen, Ph.D. Professor of Economics, University of Georgia
Facebook Conversations
17 Responses So Far
-
Today's $100 definitely is worth $80 value of yesterdays. Nice try. Work it the other way, “professor”. Jeez.
-
It looks like there's only one way to end the tax class war: END TAX
-
Complicate much? Citizen A lives in a 30-room Mansion.
Citizen B lives in a three-bedroom Ranch.
Citizen C lives in a Cardboard Box. Who receives the most benefit from the protection
government provides for their respective property? Now let us move on to these citizen's banking accounts which are insured by the FDIC, the regulatory structure that protects their property from all sorts of financial shenanigans… you get the drift.
-
The story works the other way around, as well. Let us say that instead there is inflation. Everyone decides the original set up is fair, but now everyone is making more. However, the bar tender has to pay more for his goods. So instead of decreasing the cost of beer, he increases it to $120. The people have the same argument. Hey, it's not fair to make everyone pay an extra $3.33. Us poor folks don't have that kinda dough. So the bartender makes this suggestion… The first four still paid nothing (No change)
The fifth man pays $2 instead of $1. (100% increase)
The sixth now paid $4 instead of $3 (33%increase).
The seventh now pay $9 instead of $7 (28%increase).
The eighth now paid $15 instead of $12 (25% increase).
The ninth now paid $22 instead of $18 (22% increase).
The tenth now paid $69 instead of $59 (16% increase). “That's not fair!” scream the man 5 through 9. He is not absorbing his fair share. “But I'm absorbing 50% of the increase.” retorts man 10. “But proportionally…” says man 9. “Look at the numbers. I'm paying more than you.” interrupts man 10. “But you already have more discretionary funds and don't have trouble buying bread, putting a rough over your head, and paying for your sick daughter.” With that, man 10 buys the bar. Now man 1 through 9 are paying $200 to man 10 for their beer. Posted by : Webname: Billyziege, PhD. student studying something mathy somewhere in Boston
-
in real life, the tenth person, the richest, wouldn't be drinking beer with the others. he would be drinking 1932 chardonnay at a $300/plate hideaway in the city with men 11-15. meanwhile, the first guy is worrying all night about how to pay for his wife's doctor bill. in between, man 1 serves man 10 his food.
-
Socialist party!?
Does that mean we will be playing spin the bottle? Pour one for me!
Before its all spilled on the floor.
-
Moral of the story: Don't beat up rich people, or you won't get any beer. Or something.
-
Nice beer analogy from the economist.
Or maybe not an economist. Except that to be fitting the 10th (rich) man would own the bar.
-
Fair Game - seriously? Who reposts email forwards on Buzzfeed? But I think it has made for good fodder. These responses are getting better and better.
-
This is why I use Buzzfeed: to re-read a poorly conceived essay that made the rounds six years ago in old people's chain email.
-
I stand corrected for the appropriate credit. Thanks, Blue Bottle. To all companies and corporations out there, if I ever lose my current job, PLEASE EXPLOIT ME as soon as possible! I have bills to pay.
-
WRONG… Taxes are the price one pays for the existence of the commons. The rich don't make their money out of thin air; they rely heavily on the commons, and make great use of them. One clear example of this is health: Let's say you're an employer, and you have 50 employees. There's no employer or government provided health care (the libertarian idea of heaven). Imagine, as the libertarians would like you to, that every employee is on his own getting health insurance. Because wages are low (another libertarian dream), the health insurance available to workers is either of poor quality, or is inexistent. Now, imagine one of the workers gets a communicable disease…. The libertarian idea is based on a fundamental falsehood: that the actions of one person are unrelated to the society in which that person lives, and that the actions of that person has no impact on that society.
-
I think I figured it out. The tenth man is everyone's boss who makes ungodly amounts of money by refusing to pay the first four a living wage. He lobbied the bartender for a price drop by explaining that they'd have more cash to spend on bar food and tips, but decided to horde the extra cash instead of letting the lesser men squabble over table scraps. Unfortunately his money got wrapped up with investment banks who pissed it all away. So the tenth guy doesn't show up, making the rest of the now delinquent men wash dishes to work of the debt. Then the tenth guy robs the bar and bribes the cops to look the other way. And the next week he's back to where he was, but the other guys are still washing dishes for their “free” beer. And so it goes, conspiring with bartenders to exploit his workers and placate them with booze.
-
The assumption here about fairness is inaccurate. In his example, all the men receive the same benefit, the beer, regardless of how much was actually paid by the individuals. In the real-world, outside of the simple example laid out here, the social benefits received by the wealthy far outstrip the benefits received by the poor. A more appropriate analogy would be that there are three bars: 1) Where the poor go - it's crowded, dirty, and the beer is of very suspicious quality (read inner city schools)
2) Where the middle-class goes - not so crowded, but always in danger of being pushed down the ladder
3) Where the wealthy goes — a very nice place indeed. In this example, the wealthy receive the same level of benefits, but are actually paying less. In short, it is laughable to assume that all the men receive the same level of benefits regardless of what is being paid.
-
Yea, I got that chainmail from a right-leaning family member a few days back. Not very accurate indeed.
-
http://buzzfeed.com/chris/obama-mccains-tax-pla...![[link]](http://s3-ak.buzzfed.com/static/images/public/icons/external-link2.png)
Obama vs. McCain tax plans. Click the image to see more discussion about progressive vs conservative taxation.
-
Not by David Kamerschen.
http://www.snopes.com/business/taxes/howtaxes.asp Also, not very accurate. Only seems that way to people with a limited grasp of the subject.
