Our Tax System Explained in Beer!

[DarrinS]

By: David R. Kamerschen, Ph.D. Professor of Economics University of Georgia

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. 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 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, 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 drinking overseas where the atmosphere is somewhat friendlier.

[tonylongoriafan]

i know...free loaders suck

[romad_20]

By: David R. Kamerschen, Ph.D. Professor of Economics University of Georgia

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. 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 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, 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 drinking overseas where the atmosphere is somewhat friendlier.


And this is why UGA rules! We can only explain things in beer back home:rollin

[RobinsontoDuncan]

Conservatives always seem to have a way to explain things anecdotally-- too bad the logic of ten men drinking beer doesn't translate to 300 million people paying taxes.

[Tully365]

Almost all analogies, metaphors, etc., contain elements of inaccuracy and slippage-- this one is interesting, but it conveniently leaves out things like sales tax, gasoline tax, tax shelters, real estate deductions, etc., that would more fully describe the tax climate in our country-- those types of things that led to Warren Buffet famously declaring that his secretary paid more in taxes than he did.

This simple analogy also shows why didactic literature or moral fables don't really work. If someone was anti-abortion, they could write a novel where the main character gets an abortion and then is so distraught over it that she later commits suicide. See? That proves abortion is bad. Another writer could write a novel where the main character gets an abortion, and thanks to the now available free time goes to medical school, and later finds the cure for a deadly disease. See? that proves abortion is good... either way, the morality tale doesn't really prove anything-- it simply expresses a preference and then tries to justify it with an outcome that benefits the pre-ordained moral lesson.

[DarkReign]

Almost all analogies, metaphors, etc., contain elements of inaccuracy and slippage-- this one is interesting, but it conveniently leaves out things like sales tax, gasoline tax, tax shelters, real estate deductions, etc., that would more fully describe the tax climate in our country-- those types of things that led to Warren Buffet famously declaring that his secretary paid more in taxes than he did.

This simple analogy also shows why didactic literature or moral fables don't really work. If someone was anti-abortion, they could write a novel where the main character gets an abortion and then is so distraught over it that she later commits suicide. See? That proves abortion is bad. Another writer could write a novel where the main character gets an abortion, and thanks to the now available free time goes to medical school, and later finds the cure for a deadly disease. See? that proves abortion is good... either way, the morality tale doesn't really prove anything-- it simply expresses a preference and then tries to justify it with an outcome that benefits the pre-ordained moral lesson.

Excellent post of many from you.

[Clandestino]

WASHINGTON – John McCain is pouncing on Barack Obama's call for shifting more wealth from richer Americans to poorer ones, likening it to socialism. His remarks win applause at campaign events. But they ignore the nation's long tradition of redistributing huge amounts of wealth through tax-and-spending policies.

Placing a heavier burden on the wealthy has been a cornerstone of the federal income tax since its inception in 1913. Under its "progressive" formula, in which the wealthy pay higher tax rates, the richest 5 percent of Americans now pay well over half of all federal income taxes.
http://news.yahoo.com/s/ap/20081021/ap_on_el_pr/spreading_the_wealth

[TDMVPDPOY]

lol down here they are thinkn of taxing ppl who earn +1m 50% lmao....

[Mr. Peabody]

WASHINGTON – John McCain is pouncing on Barack Obama's call for shifting more wealth from richer Americans to poorer ones, likening it to socialism. His remarks win applause at campaign events. But they ignore the nation's long tradition of redistributing huge amounts of wealth through tax-and-spending policies.

Placing a heavier burden on the wealthy has been a cornerstone of the federal income tax since its inception in 1913. Under its "progressive" formula, in which the wealthy pay higher tax rates, the richest 5 percent of Americans now pay well over half of all federal income taxes.
http://news.yahoo.com/s/ap/20081021/ap_on_el_pr/spreading_the_wealth

The richest 5% own over 50% of the wealth in this nation. Why is it a surprise that they would pay over 50% of the taxes?

[scott]

Gosh, rich people have it so hard.

[RandomGuy]

Because we should all pity women who have 1000+ pairs of $500+ shoes, and parents who spend $18,000 on an eleven year old's birthday party.

I mean, gas for those stretch Hummer limos is expensive, people come on.

:rolleyes

[RandomGuy]

By: David R. Kamerschen, Ph.D. Professor of Economics University of Georgia

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.



And after they left the tenth man went out and bought a Lamborgini worth what the first five men earned in a year, and promptly ran it into a tree.

To console himself over the loss, he decided he needed to buy a mansion in Bermuda that cost more than the first nine made in 5 years.

Pity the poor tenth man.

[ElNono]

Like I said in a previous thread about this same fairy tale, the rich man never paid the $59 and $49. He put it on the tab using his company name. One days he went back to the bar and said the company is bankrupt. So the bar owner proceeds to mail out bills to the other 9 guys and expects to get paid. This is how reality works. Reminds me of a bailout we had not long ago.

[Trainwreck2100]

And after they left the tenth man went out and bought a Lamborgini worth what the first five men earned in a year, and promptly ran it into a tree.

To console himself over the loss, he decided he needed to buy a mansion in Bermuda that cost more than the first nine made in 5 years.

Pity the poor tenth man.

Actually the car accident was alcohol induced, but he bought his way out of the DUI.

[DarrinS]

Like I said in a previous thread about this same fairy tale, the rich man never paid the $59 and $49. He put it on the tab using his company name. One days he went back to the bar and said the company is bankrupt. So the bar owner proceeds to mail out bills to the other 9 guys and expects to get paid. This is how reality works. Reminds me of a bailout we had not long ago.


That both of these socialist candidates supported.

[ElNono]

That both of these socialist candidates supported.

Absolutely.

[RandomGuy]

Actually the car accident was alcohol induced, but he bought his way out of the DUI.

Spending as much in legal fees as the first five men made in 2 years.

[Trainwreck2100]

Spending as much in legal fees as the first five men made in 2 years.

legal fees? He had the judge, the cop's boss, and the mayor in his back pocket.

AKA 7th, 8th, and 9th

[RandomGuy]

legal fees? He had the judge, the cop's boss, and the mayor in his back pocket.

AKA 7th, 8th, and 9th

"Legal fees" are how the bribes were classified on his taxes, so he could deduct it from his taxable income. Judges, police chiefs, and mayors aren't cheap.

[spurster]

This is a variation of this less-than-factual parable discussed in another thread.

http://www.spurstalk.com/forums/showthread.php?t=107103

So here is information I posted on that thread from two reports on the total marginal tax rate (federal, state, and local) by income. The tax rates are very different in the two reports, but they both show that low income household pay a substantial tax rate:

http://www.taxfoundation.org/publications/show/2282.html

Who Pays Taxes and Who Receives Government Spending?
An Analysis of Federal, State and Local Tax and Spending Distributions,
1991-2004
by Andrew Chamberlain and Gerald Prante
Tax Foundation



Table 14. Federal, State and Local Effective Tax Rates
(Taxes as a Percentage of Comprehensive Household Income),
Calendar Year 2004
Quintiles of Household Cash Money Income, Calendar Year 2004

Bottom 20 Second 20 Third 20 Fourth 20 Top 20
Percent Percent Percent Percent Percent
Total Taxes 12.97% 23.21% 28.25% 31.32% 34.55%
Federal Taxes 5.05% 12.92% 17.37% 20.16% 24.25%
State and Local Taxes 7.92% 10.29% 10.88% 11.16% 10.30%


http://www.nber.org/papers/w12533

Laurence J. Kotlikoff and David Rapson

"Does It Pay, at the Margin, to Work and Save?"
by Laurence J. Kotlikoff and David Rapson
National Bureau of Economic Research



Table 4
Marginal Net Tax Rates on Life-Cycle Labor Supply

Couples
Total Annual Household Earnings ($000s)
Income 10 20 30 50 75 100 150 200 300 500
Rate 2.1% 40.2% 40.1% 32.3% 36.6% 33.3% 42.2% 41.6% 42.8% 49.6%

Singles
Total Annual Household Earnings ($000s)
Income 10 20 30 50 75 100 125 150 200 250
Rate 0.8% 34.7% 36.7% 32.6% 34.6% 39.5% 37.3% 37.7% 40.3% 41.3%

[RandomGuy]

Don't go bringing economics into the thread. You will just confuse the conservatives, and they'll just dismiss or ignore it all anyways.

I have found, irnonically, that conservatives tend to make a lot of supposedly "economic" arguments, but just as much tend to not understand economics, when you actually dig down and call them on it or use economics to put forth supposedly "leftist" ideas.

[Wild Cobra]

This is a variation of this less-than-factual parable discussed in another thread.

<snip>

The problem with your numbers is they are not adjusted for federal income tax only when exemptions, child credits, and earned income credit places about 40% of the tax filers in a zero tax liability. That is what the parable illustrates. Federal income tax liability only.

[BradLohaus]

The professor forgot to mention that the 10th guy created the money.

[MannyIsGod]

The professor forgot to mention that if our bill is 100 dollars we're actually only paying 50 because while the richest member may owe 59 in theory this is an offshore bar shelter and he has loopholes up the wazoo so he only gives the bartender 10 bucks each time.