The taxes, the Rich, the Poor and fairness
October 24, 2008
By: 
Arohan
Category: Economy, Personal Finance
Why do the rich get the biggest tax breaks? Is the system unfair?
Here is a short parable, source unknown. You decide!
US Tax System Explained in 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 is 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. ‘Since you are all such good customers’, he said, ‘I’m going to reduce the cost of your daily beer by $20′. The 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 proportional amount (rounded off), 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 is right’, exclaimed the fifth man. ‘I only saved a dollar too… It is unfair that he got ten times more than I!’.
‘That is 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 (the richest) 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 the bill!
And that, ladies and gentlemen, 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.
Related posts:
- Hauser’s law and why raising taxes on businesses hurt more than it helps
- Obama’s tax proposal, who is middle class?
- Tax cuts, Obama style! Are we ready for more socialism?
October 24th, 2008 at 11:35 pm
Cheers!!
Linda’s last blog post..Tag! I’m it!
October 25th, 2008 at 3:56 pm
Amen! The people wanting the rich to pay more just don’t understand the system. If they keep getting taxed more and more, where is their incentive to keeping trying, and if they quit making the “big bucks” who’s going to pay the majority of the taxes so the government can pay for all the programs already in place. We’re not members of the “rich” and am rapidly slipping into “lower” middle class through self employment costs and taxes, but we can see the big picture. Thanks for this informative post.
Chris’s last blog post..You know you’re too old to trick or treat when…..
October 26th, 2008 at 9:34 pm
This is my favorite simple explanation of the tax system and describes class envy to a tee! The problem though, for those who understand this, no explanation is needed, but for those who do not understand, no explanation is possible.
October 27th, 2008 at 8:54 am
I like this short, simple and easy explanation. Those who have no idea about how the economy works or better how taxes work should get a better view on it. I have seen this before and its simplicity is great.
One thing people fail to understand is that in order fr a government to increase tax revenues they need to cut taxes. An increase in taxes will be counter productive and actually decrease tax revenues.
October 27th, 2008 at 2:29 pm
That’s nice, except to make it more realistic, the first man should be drinking his free beer from a thimble and the tenth guy driving home with the beer delivery truck for his $49. I’m not talking class envy here, either. I’m one of those guys who pays $10 for his beer and gets it by the case.
Clark’s last blog post..The Kingston Trio: Charlie on the MTA
October 29th, 2008 at 2:39 pm
Well put. Easily understandable argument against socialism.
Lucero’s last blog post..Wordless Wednesday: Smaller Waist Instantly
October 29th, 2008 at 4:10 pm
Makes perfect sense to me. Rich people shouldn’t drink beer.
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October 30th, 2008 at 4:22 pm
Well that’s an interesting analogy in theory, but in reality it is not how the tax system works. First of all, the rich guy will usually pay far less than the $49 he owes, because he will hire someone to help him deduct the bill to a much smaller one. Secondly, the other 9 guys don’t usually get mad when the rich guy saves a bigger dollar amount, if there are across the board savings. They usually get mad when the rich guy begins to get a disproportionate number of breaks from the owner than the rest of them.
If most of the breaks given by the owner are for those paying $20 or more, then the others 9 will hardly ever see any savings. Who cares if the 10th guy saves a million or a billion dollars, as long as the other 9 can save something.
October 30th, 2008 at 6:00 pm
@Linda, Chris, Daniel Beatty, Apollo, Clark, Lucero, Aldon, Thanks for the comments. Although the example is very simple, it does illustrate the basics of how the tax system works. The problem is that the complexity in the system allows many in media and politics to offer up their own spin
@Danny, the example has been carefully constructed. The rich person, top 1 in 10 or top 10% is supposed to represent the top 10% of the income tax filers in the country, while the bill of $100 represents 100% of all the taxes paid in the country. So what this example claims is that top 10% pay 59% of ALL income taxes. It is immaterial whether the rich person has hired a competent tax preparer to get as many breaks as possible, all I am saying is that the top 10% pay 59% of ALL taxes paid.
But based on your comment I did do some fact checking and it appears that the numbers were a little bit off. It appears that the top 10% actually contribute almost 70% of ALL taxes paid in this country. Please visit the site http://www.taxfoundation.org/news/show/250.html for more on this. Please also note that this data is compiled by IRS itself so should be devoid of any and all spin.
With these newer numbers, my example becomes even more stark. As regard to the ‘poorer’ folks getting mad or not is besides the point. There are politicians who choose to spread lies and half truths about the tax situation to fan the supposed ‘moral outrage’ among the populace in the name of ‘fairness’ and ‘patriotism’. The point being made is that doing this you can win an election but will drive businesses and the ‘rich’ to the more tax friendly shores.
For those who believe that raising taxes on the rich increases tax revenues so the government can expand its social programs, the facts are stacked against them. Please read the following article http://online.wsj.com/article/SB121124460502305693.html
Basically, if you want to increase government tax revenues, reduce taxes so GDP grows. And GDP will grow when the taxes are reduced on business activity and investment. Increasing taxes on the rich and businesses will decrease the GDP and simultaneous expansion of social programs will put the country on the path of economic devastation
October 30th, 2008 at 9:39 pm
Brilliant. Just plain brilliant!
Dusty’s last blog post..When Becoming Debt Free, What is your Tipping Point?
November 3rd, 2008 at 2:04 pm
Great article and follow-up comment.
I live in California and upper income people and companies have been leaving the state for more accommodating locations, like Arizona. This is very sad for the state, and will cause more hardship as the upper income tax base shrinks while the lower income tax base grows.
Michael Cruse’s last blog post..Time cannot be managed, but how you spend it can
November 25th, 2008 at 1:02 am
This is one of the better posts I have read, This was a great way of explaining our tax system. Our government wants even more from the highest taxpayers, this certainly is not fair but I guess no one ever said life was fair.
Dan_N’s last blog post..Super Bowl comes to Tampa
November 25th, 2008 at 4:34 am
Ouch, a lot of progressive tax haters in here. Remember that even Adam Smith thought that the rich should be taxed “not only in proportion to their revenue, but something more than in that proportion.”
Wan Kong Yew’s last blog post..Financial crisis revving up, not down
November 25th, 2008 at 8:34 pm
@Dusty, Michael, Dan, thanks for reading and commenting. I think there needs to be a much greater discussion in the country about taxes and fairness
@Wan, even Buffet thinks that but really, I don’t see him paying any taxes. This is really not supposed to be a flip remark, just pointing out that the argument of fairness doesn’t hold in the current tax regime. I doubt Adam Smith would approve of this
December 1st, 2008 at 11:31 pm
[…] Bottles of Beer on the Wall… Here’s a simple explanation of the US tax system. I love it. It shows explicitly why there’s little sense in complaining about “tax […]
December 4th, 2008 at 10:43 am
They already ARE drinking overseas…and it is not that it’s “friendlier” over seas…they are just more easily exploited. God Bless the US business man and his greed. It is the downfall of this country and why we have no more jobs. The rich are richer the poor are poorer and the middle class has all be disappeared. I’m a UPPER middle class tax payer who is slowly loosing my ranking. It is on OUR backs that this country rests. Not the billionaires. I agree with No. 8….the tax system is NOT this simple…only in the minds of progressive tax haters I guess. Whatever eases your guilt. Go FOX network! At least their pretty sparkly graphics keep everyone entertained.
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