Received this from a co-worker that I thought I would share. The story came from David R. Kamerschen, who is a professor of economics and University of Georgia.
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 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'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.
5 comments:
How unpatriotic to threaten to drink overseas. I get that email all the time. I guess I'm too dumb to understand what the point is. My first thoughts are that it's just a horrible analogy.
From my reading, things start to go bad once the bartender (gov't) offers the discount (tax refund). Are you trying to argue that the drunks would have been better off paying the higher price? Now that the customers can't pay their tab, the bartender will likely go out of business and then nobody can get beer. Who benefits? The rich guy who can afford to buy beer in France.
Can I afford my martinis on welfare? Screw health care reform, how about martini drink stamps?
Here's the problem with the analogy. See, when your example starts off with the flawed premise that the first 4 men pay nothing in taxes, it's difficult to make the rest of it stick.
It's all well and good to limit the discussion to INCOME taxes only, but the vast majority of Americans pay more in payroll taxes than they do in income tax. A recent analysis from the Urban Institute-Brookings Institution Tax Policy Center shows that among tax filers with wage earnings, 90 percent of those with income below $100,000 pay more in payroll taxes than in individual income taxes. And the Brookings Institute is hardly a left-leaning organization.
Here's a better example. President Bush said that his most recent tax cut proposal would provide a family of four with an income of $40,000 with a 96% tax cut. Technically true. But only if you are looking at income tax.
This family would receive a 96 percent cut in federal income taxes; its federal income tax liability would fall from $1,178 to $45. But this family pays much more in payroll taxes than income taxes. When one includes the family’s $3,060 in payroll taxes, it would receive a more modest 27 percent cut in federal income and payroll taxes. Furthermore, this $3,060 figure includes only the employee share of payroll taxes. Most economists have concluded that workers bear the burden of both the employee and the employer payroll taxes, with the employer portion being passed on to workers in the form of lower wages. If one includes both the employer and employee portions, the family pays $6,120 in payroll taxes and receives a 16 percent reduction in federal income and payroll taxes under President Bush's then-plan.
And that doesn't even take into account the fact that certain people want capital gains to be completely untaxed. So it's okay to tax people who work for their money, but Bill Gates, Jr. and his trust fund stay untaxed despite the fact that he may never have to work a day in his life. So much for rewarding hard work and achievement.
Neild, I'm not quite sure what you're trying to prove? Should we cut all the payroll taxes too? I would LOVE to cut a chunk of Unemployment, Social Security & Medicare from everyone's "payroll" taxes. Please, get rid of the "New Deal" all together. I'm also pretty sure that 100% of people using all of these "payroll" taxes make less than $100m a year. So in order to cut "payroll" taxes, you would have to get rid of social welfare programs. I don't think you'll hear much complaint from the right.
And please, you don't think Bill Gates Sr. worked hard & achieved enough to do whatever the heck he wants to do with his money, even if its give it to his lazy son?
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