The Tax System Explained with Beer

Credit to Dr. Kamerschen.

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 beer in the bar every day and seemed quite happy with the arrangement, until one day, the bar 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 just cost $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 everbody'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 $50 instead of $59 (15% savings).

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," declared the sixth man. He pointed to the tenth man, "but he got $9!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got nine times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $9 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. 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
For those who understand, no explanation is needed.

2012 Elections

Wow. After the primaries I thought Romney was going to be a good match to take on Obama. He went after Newt, Cain, and all the others with abandon. But, come the dance, he let Obama off the hook. Romney never really challenged Obama on his record, or even on his attacks. Romney was on the defensive when he had the perfect reason to go full press. But he didn't and lost.

Will America be a different country in four more year? I fear yes. 

How? These are my fears:

Obamacare will be fully entrenched. I bet the middle east will be run by extremists. Israel may be a completely different place. We will have taken away many of our nukes from the world theater, leaving Russia as the largest threat to the world. And the US economy will stagnate and look more and more like Greece. Who knows, maybe Christians will be further chastised and labeled as extremists by a larger number of Americans.

One thing is certain: the "have nots" won last night.

Someone made a point on Rush yesterday. It was this: If you split the country in half and gave Obama and his supporters one side and Romney and his supporters the other, which side of the country would you choose to live on? Which side would have the nicer restaurants, the well maintained roads, job creators, and lower crime?