The Tax System Explained in Beer

[dorminWS]

This is not new. But given the openly and unabashedly socialist bent of many prominent politicians, celebrities, and academicians these days, it is newly relevant.

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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 ball. “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 men would 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 ? 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 a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving). The sixth now paid $2 instead of $3 (33% saving). The seventh now paid $5 instead of $7 (28% saving). The eighth now paid $9 instead of $12 (25% saving). The ninth now paid $14 instead of $18 (22% saving). The tenth now paid $49 instead of $59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
“I only got a dollar out of the $20 saving,” 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 benefit than me!” “That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax 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 their 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 government ministers, is how our tax system works. The people who already pay the highest taxes will naturally 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.
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[Reverenddel]

YEP! LOVE THIS EXPLANATION! It's the best illustrated!

[ShotgunBlast]

That about sums it up. Even if you're not rich, our tax system discourages productivity because if you barely hit the next tax bracket you could make less than if you just stayed under in the previous bracket. My wife works on commission and she knows it's not worth striving for as many sales as she can get in the month because anything in addition just gets taken out in taxes. Some reward for working her ass off. Now that Obamacare is in effect you have people that don't want to make extra because it'll mess up their subsidy.

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[dusterdude]

Very true


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[dorminWS]

That about sums it up. Even if you're not rich, our tax system discourages productivity because if you barely hit the next tax bracket you could make less than if you just stayed under in the previous bracket.

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This should be mathematically impossible. The higher marginal rate does not apply retroactively to the income in the lower brackets.

[OakRidgeStars]

Sounds like a good reason to go on the wagon.

[dorminWS]

Guess that must be why the top 10% drink high-priced whisky, huh?

[Kreutz]

My old accountant advised me never to make less to avoid taxes. Said it's penny wise pound foolish.

[ShotgunBlast]

That about sums it up. Even if you're not rich, our tax system discourages productivity because if you barely hit the next tax bracket you could make less than if you just stayed under in the previous bracket.

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This should be mathematically impossible. The higher marginal rate does not apply retroactively to the income in the lower brackets.

That's my bad; I've always looked at tax brackets as paying the highest percentage over the whole lot. Maybe I need a Common Core lesson. While I've never broken the numbers down in the wife's paycheck, she does pay a higher percentage in taxes the better her month is (I think the tax calculator assumes what she makes that one month is what she'll make for all months) and her subsequent frustration makes her think it's not worth it.

My old accountant advised me never to make less to avoid taxes. Said it's penny wise pound foolish.

I think my dad was running the numbers on the Obamacare website to find the sweet spot in maximizing his income and subsidy. I think you'll find as the years go on a lot of people staying within a certain pay range (and looking to get additional income under the table) to keep their insurance "affordable".

[dorminWS]

That's my bad; I've always looked at tax brackets as paying the highest percentage over the whole lot. Maybe I need a Common Core lesson. While I've never broken the numbers down in the wife's paycheck, she does pay a higher percentage in taxes the better her month is (I think the tax calculator assumes what she makes that one month is what she'll make for all months) and her subsequent frustration makes her think it's not worth it.
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It's very easy to forget that when you jump a rate bracket the higher tax rate applies only to the wages above the old rate. I've made that mistake myself a few times when playing with numbers. And a raise frequently looks inconsequential because a 5% or even a 10% wage hike has so little impact on your net pay a paycheck after the increase is taxed at a higher rate than you're used to that it seems not to be worth the trouble of working more. Over a year's worth of paycheck it may look better, but most folks focus on those paychecks they're living from one to the other of. And I know there have been high earners who've consciously decided not to earn more money that they could only keep a small percentage of (the highest marginal personal income tax rate at one time was something like 70%).

[Swampman]

ORS - if there is beer on the wagon, I'm in!

[Covert53]

Another reason to love beer even more than I already do!

[skeeterss0]

One problem with that analogy, when the bartender reduced the price. The ones drinking for free should have recieved their savings by being paid to drink. That would reflect the nontaxpaying population that recieve our tax dollars or get a tax refund even tho they paid none.

[JustinCase]

I would have been better entertained if the story used dark liqueur (bourbon whiskey) instead of beer... cause beer is for skirts and bourbon is for men.