Monday, October 20, 2008


A correspondent submits the following:

In the first presidential debate, Barack Obama said, "'s what I can tell the American people: 95 percent of you will get a tax cut..."  Yet it's mathematically impossible to cut the income tax of 95% of Americans when only 60% of Americans pay income tax.

To understand the United States tax system, let's turn to beer.  More specifically, to the Beer Explanation of the Tax System.

The Tax System - Explained With 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'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, to pay even half 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.


repoman said...


This post was great. What a simple but telling example.

Its the "Atlas Shrugged" effect, and, with the number of people paying no taxes headed for 50% plus, the day the "payers" head for the hills may not be far off.

scape32 said...

When Obama goes looking to skim taxpayers making over $250K, he's going to find far fewer of them.

Watch our illustrious NYS governor. He's the canary in the mineshaft with his clarion call to legislators for an emergency post-election current budget deficit meeting.

The October tax receipts are coming in and individuals, corporations and small businesses paying estimated and quarterly taxes are showing that tax receipts are falling like a rock. The demise of the financial industry, estimated at over 20% of the national economy's earned income, is going to change the equation Obama has in mind for redistributing wealth.

So, when he and his socialist cronies realize this fact, where do you think they're going to go?

Over $150K? $100K?

Be careful what you ask for, you might get it.

davesnyd said...

Nice thought, except for a couple things:

1. Overseas isn't friendlier-- as the repubs like to point out, they have higher marginal rates than we do.

2. Presenting it this way frames the issue inaccurately to begin with: breaking it down into percentiles without accurately also describing the income and wealth in those percentiles does not do the issue justice.

A more accurate approach is: the first four friends walk to the bar. The next four drive (in order): a moped, a smart car, a minivan, and a Lexus truck.

Number nine arrives in a limousine.

Number ten drives a beer truck.

Now-- who do you think should pay more of the bill?

Maybe that addresses "taxes as a function of wealth"

3.Next approach: the first four guys walk in with $20 each in their pockets. The next four have: $30, $60, $80, and $120. Number nine has $500 and number 10 has $2000.

What the story doesn't mention is that each person paid a $4 cover charge *just to get into the bar* ("FICA"). And, in fact, because number 10's $2000 is all in "capital" rather than "earned income", he doesn't even pay the cover charge.

Now, they pay the amounts below: 0, 2, 5, 9, 14, and 49 (plus the cover charge).

That approach addresses "taxable percentage as a function of income". Percentages: 20%, 13%, 10%, 11%, 11%, 4%, 3%

What's fair is in the eye of the beholder.

So-- in my book, Number 10 ought to whine a little less, be thankful for his bankroll and beer truck, reflect on the fact that the only way he got into Harvard was because daddy was connected, and stop trying to launch needless wars overseas.