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.

Liberals, Capitalism, and Taxes

There is a massive disconnect between Liberalism and Capitalism. It can be captured very easily under a single day-to-day activity: taxation.

(Side Note: Liberalism is decidedly different than Obama's Anti-colonialist mentality)

I found an article talking specifically about how Apple is managing to have a global 10% (or so) corporate income tax rate. I'll pull some quotes from this article and try not to be out of context.

As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent.

The disconnect is most obviously seen with companies such as Apple and other industry giants in that they are large enough organizations that it is advantageous for them to exercise as many options possible to reduce their operating costs. The various executives, CEO's etc have this fiduciary requirement to the share holders and the employees to do everything legally possible in order to maximize the growth of the company. 

Liberals, and many people who consider themselves to be social progressives, feel that a person's (and by extension, a business') responsibility is to their community and government. If a business is benefitting from a local university, then it should provide the funds necessary for the university to operate. 

“I just don’t understand it,” he said in an interview. “I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete’s sake. 

“But then they do everything they can to pay as few taxes as possible.”

If the government (local, state, fed) is in need of income to make impossible to keep promises to buy votes, I mean in need of income for their programs to help those in need, then it is the responsibility of those earning the income to pay the bill.

This is reminiscent of where unions were with the Big Three very recently. Unions felt they were entitled to a certain dollar amount that was not tied to the well being of the business. Thus, the Big Three have suffered. The US government (and state governments), tax recklessly without realizing that yes, businesses will leave if it becomes advantageous. Now, governments are feeling the pain of their poor tax decisions.

Liberals are disconnected from the business demand to be as profitable as possible. If governments (and schools, programs, etc) were run as a business, then we would all be better off. But, right now they are intent on blaming businesses for demanding lower rates which cuts into state "revenue".

Such lost revenue is one reason California now faces a budget crisis, with a shortfall of more than $9.2 billion in the coming fiscal year alone.

A business has no room for wastefulness. It cuts into profit, employee efficiency, product realization, public opinion. If a company overlooks the slightest of gray spots within its walls, then there is a potential that the area could release a product the leads to poor public reaction which can manifest itself with reduced sales, reduced profit from extra work required to fix a problem area, reduced profit from unsold inventory, reduced profit from expenses which cannot be recouped. 

The US government is the perfect model of wastefulness. 10's of millions get lost in appropriations, campaigning expenses, "deal making" for a bill to pass, random projects receiving funding which have no need, nearly complete projects being cancelled, etc, etc, etc. This extends to state governments to a lesser extent, but it is still the same. But, law makers have resorted to these various projects as their way of winning votes. They call fiscal conservatives criminals, haters of the elderly, people who want to make the poor suffer, racist. And it works. Rant over, sorry.

There are genuine liberals out there who do not see the government as the problem, but the solution. Fine. But, they feel that the way to give the government its funding is through raising revenue through increasing taxes. Corporations, the creators of jobs, have it as their duty to figure out how to avoid as many taxes as possible. So, when the tax rates start rising to fund the programs Liberals are after, businesses start moving the jobs to where taxes are lower.

This includes Nevada, Luxembourg, Singapore, Ireland… They open offices in states and countries with low tax rates. The corporations are going to do their business. They are going to make money. And they are going to do it in a way that is as advantageous as possible. Liberals don't get this idea. 

“Apple, like many other multinationals, is using perfectly legal methods to keep a significant portion of their profits out of the hands of the I.R.S.,” Mr. Sullivan said. “And when America’s most profitable companies pay less, the general public has to pay more.”

Solution: Make government more like business. A simple idea is to just be competitive tax wise! How much more money would California have if it wasn't in Apple's interest to open a business in Nevada for tax reasons? Look at Cupertino - Apple threatened to move away from the city if they didn't allow Apple to build their new campus. It wasn't blackmail, it was a reality of doing business. Cupertino realized this and backed down from demands of Apple. They now get to keep their tax income. And remember, tax income is more than tax from the sale of goods - it includes income tax from the people employed in the state.

If the US government lowered corporate tax rates to be competitive with Ireland or other countries which have become tax havens, how much more money would the government now have in its coffers? Or, how about if the elected officials were less concerned about being re-elected and more concerned with making the government as streamlined and efficient and a positive force in the life of individuals, wouldn't we be better off?

But no. Apple (and others) are dubbed as villains for being wise and shrewd. For not doing their "fair share" in giving the government the un-checked funds that it feels it needs (for election purposes). 

America, we need change.