Wednesday, February 24, 2010

Paying Tax

This is one of these rare occasions in which I copy someone else's post. And this time it's a post I don't even agree with. But I like it nevertheless, as it questions our most fundamental assumptions. And questioning assumptions is something we don't do enough, but need to do much more:

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 $15 instead of $18 ( 20% 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 man 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, this 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


corfubob said...

A nice little story, for simpletons. I wonder if the author is so intellectually dishonest in his work, or does he believe this crap. God help his students - and America.

ranfuchs said...

Interesting that you should criticize the author, without saying anything material about the story itself.

Jeremy from We Took The Bait said...

Here's my opinion, though it's wishful thinking on my part.

The ten men drinking beer in the previous scenario were all meeting up at the bar on payday.

Their paychecks looked like this:

Guy 1: 100 dollars
Guy 2: 200 dollars
Guy 3: 300 dollars
Guy 4: 400 dollars
Guy 5: 500 dollars
Guy 6: 600 dollars
Guy 7: 700 dollars
Guy 8: 800 dollars
Guy 9: 900 dollars
Guy 10 : 1000 dollars.

The bill comes for 100 bucks.

Best way to divide it?

Guy 1: 2 dollars
Guy 2: 4 dollars
Guy 3: 6 dollars
Guy 4: 8 dollars
Guy 5: 10 dollars
Guy 6: 12 dollars
Guy 7: 14 dollars
Guy 8: 16 dollars
Guy 9: 18 dollars
Guy 10: 20 dollars

You've got 110 bucks there.

If we're tipping the bartender, we may need a little more scratch anted up... we'll say a quarter for the first guy, 2.50 for the last guy, and the same even distribution between.

Or, if we don't have to tip, and expenses at the bar don't change from one year to the next, it looks like every 11th year the drinks are on the house! Yeah! Free beer!

But, the rich man will ask why he has to pay ten times the amount that the first guy pays when he's drinking the same amount.

Simple: because you earn 10 times as much, you pay ten times as much.

And, those on the rung below you will aspire to one day have a 1000 dollar paycheck, so they can contribute 20 bucks to the bar tab. Or better yet 5000, so they can pay 100 bucks in.

But, this will never work. Because, though the Declaration of Independence says that all men are created equal, that should not carry over to their tax law.