Taxes and Tax Cuts in Terms of 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 curved ball (or is that a curved beer!).
'Because 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 paid $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 me!'
'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, 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
Universityof Georgia
