Thread: The Tax System Explained in 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 total.

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.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

http://scottnolansmith.wordpress.com...-through-beer/

This is old but to the point. If there are any true blue lefties they will chime in about the kind of beer each was drinking etc etc.

True, but the long and short of it is that in order for Obama to really do anything to help the system, he'd have to do a major overhaul on the tax system, something that federal law makers, even his left wing majority in the house and senate, aren't ready to do.

the assumption in there is that the ultra rich man pays all of his taxes at the highest tax bracket and I'm pretty sure no one is dumb enough to think that actually happens

Yes but the poorest dude also pays zero taxes AND get a stimulus check that the rich guy pays for and doesn't receive.

Originally Posted by Emo

the assumption in there is that the ultra rich man pays all of his taxes at the highest tax bracket and I'm pretty sure no one is dumb enough to think that actually happens

The only taxes the ultra-rich man doesn't pay at the highest bracket are capital gains and qualified dividends.

And the "ultra-rich" man isn't meant to be an individual in the metaphor. It's supposed to be a corporation, who pay taxes on all gains at the statutory rate (No, sukie, they don't pay at capital gain rates, except for maybe a few Section 1231 gains, and that's subject to depreciation recapture rules and whatnot). What people naively get ticked off about, are the deductions they receive, such as for qualified domestic production, and the dividends received deduction.

Also, what people fail to realize, is that if Corporations keep their profits above a certain threshold, they get taxed on them again at an additional 35%. They have to distribute them to shareholders, who get taxed at a much lower 15% in most cases, instead of their statutory rate (or 10% or 5% if you're in the lower tax brackets). Corporations don't have it as "easy" as people like to think. Right now, it's just enough to keep Corporations from leaving, and even that is questionable.

I know the corporate tax isn't at cap gains rates. BUT corporate taxes are one tax on set of money "A" then the individual is taxed on the portion of set "A" they receive at the varying rates.

However, if the Corps were to hold on to that "set A", they'd be taxed again, at much higher rates than the individuals receiving those dividends. It's called the accumulated earnings tax. Unless you're in really, and I mean really good shape (i.e. Google, who can supposedly pay this), it's a killer.