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United States Tax Analogy

Hello friends, here is something David Westbrook sent me. I thought I’d pass it along. It’s not profoundly in-depth, but it gives just enough real information to be an accurate representation of the tax system, and shows a little moral about going Galt. Enjoy.

The US Tax System explained – with Beer!

A brilliant explanation of the US tax system using actual percentages, the impact of a tax cut, and the public reaction that even Obama should be able to understand.

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.

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

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And here is the blog in its original context.

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  1. Flotsam_Bakery
    August 9, 2009 at 5:00 PM

    The comparison seems to fall kind of flat. The poorest aren’t complaining that the richest are getting the biggest benefit from a tax cut even when they get taxed so much, any idiot that understands proportions can understand why they would get more from a break. They understand that the richest can pay so much and still very well afford their beer, while the poor can barely afford it and wouldn’t be able to get beer if they didn’t get their breaks.

    Also, if the richest wants to leave, thanks to our system there will be someone under him that will just replace him and probably won’t complain about being taxed so much since he would be making so much more than he would before entering the highest bracket. Sounds like Mr. Rich guy got his feelings hurt and was feeling too greedy to realize how much of an ass he was being.

    • August 9, 2009 at 9:21 PM

      I would counter that the person replacing the richest would not do nearly as valuable of a job, since, in reality, the free market allocates payment based on ability. The mega-rich entrepreneur is rarely a replaceable phenomenon. If we ran out Bill Gates and took all his money, everything would be great until we wanted a genius to develop a new operating system in his garage, at which point we’d suddenly realize that we had persecuted the men of ability out of existence.

  2. donny
    August 19, 2009 at 5:47 PM

    question:
    does the beer represent the services one receives for his taxes? or does the beer represent the amount of money one makes? if it is the latter, then doesn’t the richest man get 95% of the beer, and pays 59% of the taxes?
    please advise.

    thanks

    df

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