Tuesday, March 18, 2008

Our Tax System

Our Tax System Explained: Bar Stool Economics

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 inste ad 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 got'

'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!

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.

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.

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