The funnies of taxation
Posted on February 11th, 2008 in Funnies, On Politics, Personal Messages, Rants
I wonder why our presidential candidates have not talked to the people in our country about taxes using an illustration like this one, reportedly authored by David R. Kamerschen, Ph.D. and Professor of Economics at the University of Georgia and later proven otherwise.
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. “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:
- 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 pay $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’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 among all of them for even half of the bill!
And that, ladies and gentlemen, 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.
I left this little gem in to answer my original question as to why presidential candidates are not using this illustration to talk about taxes to the US citizenship:
June 4th, 2008 at 7:23 pm
It’s quite simple why this example you use seems to be unfair. Respectfully, let me explain. You are using a tax example of what we call a spending tax. When I go to the store to buy some gum, or beer, the tax rate is set as flat. I can only think of some rare instances the store owner would not charge a customer the same tax rate as someone else (a contractor or manufacturerer may have a license so that tax is not added into production costs).
So, when 5 men go into the bar, all will pay the same tax rate. That is exactly how our system is set up. On the other hand, if we really want to compare each of the customer’s tax rate to their income, the infamous INCOME TAX, then you will clearly see that the rich guy (depending on his “richness”) is not paying his fair share. Why? Because the the beer, no matter the cost (remember evryone pays the same price for a beer, or hamburger at McDonald’s) might be 5% of the poor man’s income, while the rich man might enjoy his brew at only 1% of his income. I emphasize, everyone pays the same price when they buy something at the store. There are sales taxes, and then there are income taxes. Neither can be compared to each other if you really want to make a fair argument.
Respectfully, Gary Ruff
June 5th, 2008 at 8:55 am
I like the points you make, and much of what you say has merit. However there is one thing that I will contend with you on:
How is the fact that a person earning more that someone else lead to that person not paying a fair share when paying the same as the someone else who earns less? And how would this “unfairness” lead to justification of a scaled, graduated income tax system in which those that earn the most pay way more as a proportion of their wealth than those that do not earn as much?
I suppose it would be the same as going to the store to buy something and being told that the more it costs the greater the sales tax would be (because obviously you could afford the greater tax since you could afford the greater cost). If everyone can pay the same when spending on things, why can we not all pay the same when paying the government?
Now don’t get me wrong. I am not saying that everyone should pay a flat amount as our income tax. But when it comes to income tax, why can we not all pay the same percentage of our income like we do when paying the same percentage sale tax on consumables?
If I make $10,000 per year and pay a 9% income tax, the government will get $900 from me in the form of taxes. If my neighbor makes $100,000 per year and pays a 9% income tax the government will get $9,000 from him/her. He makes 10 times as much and pays 10 times as much.
In our current condition, if I made $10,000 per year my base income tax would $1,109 as a single person with no dependents. My $100,000 per year neighbor would have a base income tax of $22,111 as a single person with no dependents. He makes 10 times as much as I do but is liable for almost 20 times as much income tax. *
There are a few other areas in which people with any kind of money get spanked for having it (investments for example, and property taxes for people that can actually buy a home in this country), but even in those cases much of the taxation applied is applied in a flat manner.
Why should it be that someone who earns more should be expected to carry more of a tax burdern (exponentially so) than those that don’t earn as much? It cannot be because of the “unfairness” of our spending tax system that allows the more wealthy people to not pay their fair share.
Thank you for taking the time share your thoughts with me. I do appreciate your comments. And I find what you have written to be insightful and clearly written from the perspective of someone who knows their stuff. If I could ask, how did you happen across this post?
* Values were calculated from the following tax calculation table.