The Beer Theory of Taxation

[Gelare]

Never let it be said that economics is boring. Forwarded to me from one of my friends:


OUR TAX SYSTEM EXPLAINED IN TERMS EVERYONE 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:
1. The first four men (the poorest) would pay nothing.
2. The fifth would pay $1.
3. The sixth would pay $3.
4. The seventh would pay $7.
5. The eighth would pay $12.
6. The ninth would pay $18.
7. 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 on 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:
1. The fifth man, like the first four, now paid nothing (100% savings).
2. The sixth now paid $2 instead of $3 (33%savings).
3. The seventh now pay $5 instead of $7 (28%savings).
4. The eighth now paid $9 instead of $12 (25% savings).
5. The ninth now paid $14 instead of $18 (22% savings).
6. 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!

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
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

[Nesslandria Haneh]

I have read this before. ;D

Thanks for posting!

[Rook]

It does provide food for thought.

[Derek Nahigyan]

I do like this--especially since it's easier to understand--but speaking from a realistic perspective, I don't think the fifth man would be enraged about a dollar since he's now drinking for free, however in the larger scheme of things I'm sure a lower middle class-man would.
Because I believe this is relevant, here's an excerpt from George Orwell's 1984:
"Throughout recorded time, there have been three kinds of people in the world, the High, the Middle, and the Low. The aims of these three groups are entirely irreconcilable. The aim of the High is to remain where they are. The aim of the Middle is to change places with the High. The aim of the Low [when not pressured on making it through the day] is to abolish all distinctions and create a society in which all men shall be equal. Thus throughout history a struggle recurs over and over again. For long periods the High seem to be securely in power, but sooner or later there always comes a moment when they lose either their belief in themselves, or their capacity to govern efficiently, or both. They are then overthrown by the Middle, who enlist the Low on their side by pretending to them that they are fighting for liberty and justice. As soon as they have reached their objective, the Middle thrust the Low back into their old position of servitude, and themselves become the High. Presently a new Middle group splits off from one of the other groups, or from both of them, and the struggle begins over again." (P. 178-179; published by Plume, 1983. Copyright by Harcourt Brace and Company.) Again forgive, the awful citing, I just hope it's enough to not be sued.
I do appreciate our Majesty's taxation policy of taxing the High more money and taxing the low less to get everyone to even out. I know things like that are more complicated when society's grow but with teamwork and understanding, everyone can voice an opinion--the larger the country the harder it is to communicate and account for everyone.

[Gelare]

Apr 26, 2008 17:33:17 GMT -5 Derek Nahigyan said:

I do appreciate our Majesty's taxation policy of taxing the High more money and taxing the low less to get everyone to even out.

It's worth noting that in a society with a flat tax - a taxation policy along the lines of, "Everybody pays exactly 10% of their income," - the rich still are taxed more money, and the poor less, since ten percent of a rich person's income is way more than ten percent of a poor person's income. Of course, most countries implement a progressive income tax, where, say, the poor pay nothing, and the rich pay twenty-five percent.

[Mira O'Halloran]

I did find that amusing and interesting.

[Rook]

Apr 25, 2008 14:57:51 GMT -5 Gelare said:

OUR TAX SYSTEM EXPLAINED IN TERMS EVERYONE 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:
1. The first four men (the poorest) would pay nothing.
2. The fifth would pay $1.
3. The sixth would pay $3.
4. The seventh would pay $7.
5. The eighth would pay $12.
6. The ninth would pay $18.
7. 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 on 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:
1. The fifth man, like the first four, now paid nothing (100% savings).
2. The sixth now paid $2 instead of $3 (33%savings).
3. The seventh now pay $5 instead of $7 (28%savings).
4. The eighth now paid $9 instead of $12 (25% savings).
5. The ninth now paid $14 instead of $18 (22% savings).
6. 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!

Quoted for convenience. Somehow we've gotten this impression that because they earn more, the only way they can pay their fair share is by paying disproportionately more than everyone else. Also, though I don't know if this was an intentional allegory, this also assumes that the amount of taxes owed are decided by some external forces and the people have to have their bill altered to conform to that debt.

The thing that bothers me most about our tax system and this example is the idea that fiscal responsibility is someone else's problem. Not paying for your beer is a great incentive not to work harder to make more money. These 'tax brackets' can literally force certain people to watch their hours down to the penny because if they make $10 too much they suddenly find themselves earning less than they did before due to increased taxes. When a straight percentage is used everyone pays their fair share. The rich automatically pay more. 10% of a million is far more than 10% of 25,000. There would be no reservation against earning more, as you will never take home less money than you did before by virtue of earning more.

The problem here is that it shifts the burden of fiscal responsibility to the state while at the same time creating an incentive for the government to get people off welfare and earn more. I highly doubt the American legislature is ready to first look at how much they received before deciding how much they can spend; instead of spending money and looking for ways to get that much back.

In Uantir though the Crown exists to provide the basic fundamental necessities that government exists to provide and nothing more. If the Crown needs more money than it's our job to make its people earn more money.

-Edited to fix the broken quote code.