The US Tax System explained – with Beer!
A brilliant explanation of the US tax system using actual percentages, the impact of a tax cut, and the public reaction that even Obama should be able to understand.
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 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
| 2.9 (7 people) |
Tags: LazyHumor, Math Humor
May 25th, 2009 at 4:08 pm
Except that the US has one of the lowest tax rates in the world. Good luck finding a country that will tax you less and allow you to be a citizen.
May 25th, 2009 at 5:57 pm
You fail to put up here what happens when the price of beer (taxes) goes up.
That’s not even taking into account the other forms of taxes like taxes on good or property taxes too.
I’d say generalizing taxes like this leads only to mass misinformation and could be taken in a wholly incorrect way.
May 25th, 2009 at 7:41 pm
But what many people don’t realize is that generally the first man(poor) gets up in the morning and does all the same things like the tenth man(richest), eg. bathroom stuff, gets dressed, has breakfast. Then both spends the same amount of time and effort doing their work in the morning…then both have lunch…then both spend about the same amount of time and effort in their respective work in the afternoon…both have dinner….both go to sleep at night….yet the rich man…well…he’s rich…the american dream..work hard and commit and you can be like the rich man…yet others can work just as hard and not get rich…really expand your definition of what a tax is…and the rich man is not paying more at all…
May 26th, 2009 at 1:55 am
For a PhD your logic is flawed and your analogy imperfect. First, The richest man definately gets much better beer than the rest. The poorest of our society ( who are taxed ) make make around $7300. They are taxed at 10%. That leaves around 550 or so a month to make ends meet. Try finding a place to live, utility money, etc, and still have enough for food. Many at this rate are single mothers, so they must also feed and clothe their children. We don’t give these children help, that would be welfare! Meanwhile the rich guy is taxed at 35%! Oh my god! if he makes $150000 per year (not millions) he still has $100,000 to play with. This she does not write of his houses, business trips, Dinners and all they other write offs. Poor rich guy! I feel so sorry for him. Oh yeah, he needed an education, so theirs a very good chance his parents were loaded as well. Since they can inherit wealth at little or nothing, these rich get richer while the poor stagnate for generations. Yeah they rich pay more for beer, but their beer is in a diamond studded gold mug that they keep. If GWB’s tax xut showed one thing, give the rich more money, the poor get little to nothing (just stagnate wages that lose value to inflation and health care. Maybe they should flee, They can be replaced.
May 26th, 2009 at 4:24 am
i don’t see anything about tax shelters or federal subsidies being given to a coalition of the top three men, either.
explaining by inaccurate analogy is a pretty misleading technique, dude.
May 26th, 2009 at 8:04 pm
Get a job!
May 27th, 2009 at 2:08 pm
Ah yes… those poor, poor… rich people…
May 28th, 2009 at 5:32 pm
P.S. Who cares if the analogy is “imperfect”. It isn’t far off and yall know it.
May 28th, 2009 at 8:58 pm
There is nothing “fair” about a small group of people paying the majority of a bill for services that all people benefit from. The poorest do not pay federal taxes (currently the bottom 40%) and these numbers are growing thanks to the new administration. Relying on a small group to pay the bill is putting all eggs in one basket…not smart. There needs to be accountability of all members of this society. There are many reasons why most people are not considered wealthy. From my experience I see most people making bad decisions throughout their lives, repeatedly. Just like the mortgage bailout…bad decisions were made and then people get in trouble and rely on others to pay for their mistakes. No responsibility or accountability. No focus on doing the things necessary to be successful and to make more money. Most people in this country want to be entertained instead of educated. Watching American Idol and other time wasting TV shows is our national past time. Spending money you don’t have on things you don’t need is this country’s greatest skill. Complaining about the “rich” as though they are the bad guys and deserve to be punished is the great American philosophy. The vast majority of the “wealthy” that I know worked hard on their careers and for their money. They were successful because they did the things that the unsuccessful wouldn’t do. Why should they have to shoulder the burden of everyone else?
May 29th, 2009 at 1:12 am
@ Tom
I love this response. “The poor just make bad decisions, if they really wanted to, they could be rich too!” We can’t all be CEO’s. We need ditch-diggers, cashiers, and overnight stockers. There is accountability. If you have great benefits and advantages, it is your social responsibility to your fellow man to do more. In a “fair” world, we’d all do the same amount of work, spread the money around evenly and live the same way. Yeah, you’re right, that’s communism. *Shudder* So we have this. This system that asks the rich and advantaged to help the poor. If you have a great deal more, you should be giving more, because the more of it you have, the less of it you need. If one man can afford ten beers, and nine of his friends can’t afford them, should he just drink all ten because he has them? I guess he’d have to, and really pound them, if he wanted to be able to live with himself and call himself a human being.
May 29th, 2009 at 4:52 am
First of all, Tom. It’s actually closer to the 50% described in the analogy that don’t pay taxes, but you’re close.
Withholding is NOT the same thing as paying taxes. Just cause you see something taken out of your check, and then you get a check from Uncle S(h)am after you file your returns, it doesn’t mean that you paid anything to him.
The poor do not pay taxes. Earned income credits and/or child credits, as well as any additional credits that can be claimed by the individual, plus whatever is “overpaid” generally makes up for anything they ever pay out in taxation at the lower echelons of income. In many cases, it’s even MORE than they’re taxed.
I’m one of those near the bottom of the income scale. I chose not to have ANYTHING withheld from me at the federal level when I set up my tax withholding for my employer. Gives me more money to spend and save during the year.
Even with nothing withheld, I still get back nearly $4300 because I’m “poor”, and I’m married with a child. Far more than any taxation levied upon me would have been.
And Enbert, think about that rich guy for a second. He’s taxed on the same dollar multiple times. FICA, Federal, state, local taxes, property taxes on his home(s), business(es).
Then there’s capital gains taxes on investments and securities. Investments which were made with money that had already been subject to taxation…..
According to the IRS’s numbers, the top 1% if INCOME earners pay 1/3 of the income taxes collected. The top 50% (middle AND upper class) paid just over 97% in ALL income taxes collected. This isn’t even counting any other federal taxes that are levied. And you want to criticize them?
The median income range is between $40 and 50k. That’s where the line is drawn between “taxpayer” and “non-taxpayer”.
I hope the rich do flee. Then the next time you want a job, you can get one from a poor person. At least it’ll make you shut your yap when you can’t find one.
May 29th, 2009 at 6:02 am
Sorry about that last post Tom. I made it sound like most of my rant was targeted at you, and that wasn’t the case. I agree with you completely.
Also, Enbert, the federal income tax does NOT take in consideration the location in which you live. $150,000 is $150,000 regardless as to the location in which you make it and the relative cost of living.
In some areas, especially major metropolitan ones, that isn’t a lot of money, especially when compared to the rural and small town area in which I live, where more than $100,000 a year is filthy rich, and “millionaire” is unconscionable.
Sure, in New York or California, you can make $250k a year pre federal and state tax and live in relative comfort, but depending on your location, you may never get in a position to buy a home for your family without giving up being close to work, or in a good school area for your kids. Costs of living are higher in the city, so the money doesn’t stretch as far as you’d like it to.
Also, think about major metropolitan states like New York and California and their state income, VAT, and local sales and income taxes. In California, falling in the highest federal tax bracket, you could be paying between 45 and 50% in income taxes with a combined state and federal tax! Not to mention any sales, property and various other taxes levied against you in the meantime.
That $150,000 income you were getting doesn’t look that great afterward, does it?
May 29th, 2009 at 1:00 pm
@Aaron.
“I love this response. We can’t all be CEO’s. We need ditch-diggers, cashiers, and overnight stockers.”
That is true.
“If you have great benefits and advantages, it is your social responsibility to your fellow man to do more.”
Who put that responsibility on me or anyone else to make sure everyone else is taken care of? I didn’t accept it, it was unfairly thrust on me.
“In a “fair” world, we’d all do the same amount of work, spread the money around evenly and live the same way.”
Wrong. In a fair world, we’d stop worrying about what everyone else has, and start worrying more about what we can do to get more of it without resorting to what is essentially THEFT.
“So we have this. This system that asks the rich and advantaged to help the poor.”
It doesn’t ask that you help. It mandates that you subsidize. It forces you to ensure for their wellbeing. If that poor person really cared, they’d put in extra effort to make up for their “disadvantaged” state. They’d work extra hours or extra jobs. They’d put off having kids if they can’t afford the bills that come with them.
If you really cared about the poor, you wouldn’t pay taxes. You’d donate that tax money to shelters, food banks, charities, and then go volunteer. If you really cared about the poor you wouldn’t pay into social programs mandated by government, you’d get off your own ass and your own wallet and go help them.
“If you have a great deal more, you should be giving more, because the more of it you have, the less of it you need.”
What gives you, or anyone else, the right to dictate and decide how much of MY stuff I truly need? What makes you think that you, or some government official, would be able to make a better decision about how my money or my property should be given to another or used and how much of it is overburdening me?
“If one man can afford ten beers, and nine of his friends can’t afford them, should he just drink all ten because he has them? I guess he’d have to, and really pound them, if he wanted to be able to live with himself and call himself a human being.”
Those are his beers. He can do with them as he wishes. Again, you want to tell this man how he’s got to act, that his property is subject to being confiscated by someone else because they have a “need” for it? Just because you have a need for something doesn’t give you a right to it.
May 29th, 2009 at 5:10 pm
Great line Aaron; “The more of it you have the less of it you need”. How do you know what I or anyone else needs? Have you determined a standard of living for us? What can I spend my money on? As far as I am concerned my money is going to handle my family’s responsibilities and preparing my children not to be ditch-diggers, cashiers, and overnight stockers. They will be accountable, responsible, and productive people…not dependent on others to pay their bills and bail them out from bad choices. They will be tax payers not welfare receivers. And if you didn’t know, this will cost me a lot of money to ensure this goal. I would prefer to allocate MY earned income to this cause; not making sure my fellow man can drink a beer.
You also made the statement that there is accountability. Then you immediately assigned it back to a small group of people. I am looking for universal accountability. Everyone steps up to make their own lives better. No one wants to be poor but very few do anything to change or improve their situation. Of course not everyone can be a CEO and we need all types of hourly wage earners but very few people put the effort into improving themselves for better positions. People lack skills (thinking skills in particular) and wonder why they don’t earn much. To most people life is about being entertained not educated.
The real tragedy here is that there is a group of people in this country who truly need the assistance of others to survive. They are the ones who were born with mental or physical handicaps or developed them later in life. These people didn’t have a choice and were dealt a bad hand. They don’t have the same options that everyone else has. We should do everything we can to help and support them. What gets lumped into this group are those who don’t consider themselves “the rich” and expect someone else to pay for their ride. There are reasons why people have low paying jobs — most of them self inflicted. Here is fun fact I read in the paper this week – 10% of ALL government spending goes to substance abuse programs. Prime example of people making bad decisions and depending on others to pay for it.
If everyone started trying to improve their own lives and those of their family then there would be fewer people needing handouts and more money available to provide to the truly needy. Unfortunately this takes a lot of effort and is hard work…but wait, isn’t Dancing with the Stars on?…somebody get me a beer…Aaron you buying?
June 3rd, 2009 at 12:52 pm
Beer doesn’t get less expensive, it gets more expensive. Taxes usually go up not down. Has there been an response from the author that illustrates costs going up?
June 3rd, 2009 at 2:52 pm
Like I have always said, “I have never received a paycheck from a poor man.” Chase those away with the money and there will be none for the rest.
June 4th, 2009 at 12:23 am
Jesus here–
Just would like to remind you all what I said, “Inasmuch as ye do it unto the least of these, my brethren, ye do it unto me”.
June 12th, 2009 at 3:58 am
Howcome is there a difference in the first place.
Why does the rich man have more money than the (9) poorer?
Does the poor guys (really) have the same opportunity in the land of opportunities to make the money the need to be as rich as…?
Does the professor have an explenation to that?
June 14th, 2009 at 10:32 pm
The rich guy actually only pays about 17.2% in federal taxes, including payroll taxes, if any.
I make much less than the top 400…3 orders of magnitude less, and I pay 30+% to the fed, not including sales, incise, property, state income, and whatever else I can’t think of right now, in taxes. The US has a hugely high tax rate these days if you add up all of the taxes, and we’re not even a developed country anymore (50 million+ with no access to healthcare, yet the per capita healthcare cost is the highest in the world).
June 29th, 2009 at 2:04 pm
The author forgets that the top 10% make more than the lower 90% combined. This analogy really isn’t great. It maybe should go something like this:
The first four pay 0% of their income for the beer, because they don’t make enough.
The fifth man pays anywhere from 15-20% of his income, and gets 1-2% back in an adjustment at the end of the year.
The sixth person pays roughly 10-15% of his income, and gets 1-2% back in an adjustment at the end of the year, but loses a lot when the top 3 people decide the beer market can’t hold itself up.
The seventh person owns a brewery, employs the first four, doesn’t report their incomes, and still applies for hardship exemptions.
The 8th person does everything legally, pays their 15-20%, then gets fined by the government on a technicality while the 7th person isn’t bothered.
The 9th person is the government, and somehow still has to pay taxes on the monies their employees make, which come from tax dollars and the 10th person.
The 10th person pays less that 1%, then applies for all sorts of exemptions (say, for houses, charity, et cetera,) which are more than the other nine make in a lifetime. Thus, 99% of their income is expendable, they run the stock market, banks, auto makers, oil companies, and get special exemption just because they are feeding the government so much of their money.
But who knows, maybe this is too complex for the average person…
July 2nd, 2009 at 11:30 am
I’m still not sure how a flat tax rate is “unfair.” Isn’t the point of working to move up, and isn’t it counterintuitive to punish people who work harder by taking more of their money?
A few years back I worked like a madman and got a huge Christmas bonus… which bumped my yearly earnings into a new tax bracket, and ended up costing me two grand. The lesson? Don’t work quite so hard.
The American tax system is broken. Studies have shown that if everyone paid 17%, with no possible deductions, we’d have the same operating capital we have now.
August 8th, 2009 at 9:45 pm
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