I stole this word for word from my Dear Brother’s site, Weekend Pundit-
How our tax system works …
Suppose that every day, the same 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% saving s).Each of the s ix 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.
This explanation has been attributed to many different scholars and economists, but Snopes wasn’t able to pin down the origin of this ‘lesson’.
That doesn’t make it any less true.
{ 18 comments }
One slight flaw in this old chestnut: the guy who pays $59 gets more beer than the guys who pay $0. How much more is open to discussion, but he does.
Really? I’d like to see an explanation of how you come to that conclusion. Note that I am myself making an assumption or two, namely that these guys are drinking in rounds and that $100 is the total bill for all the beer consumed.
Just curious where I’m going wrong here.
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That’s why I said it’s open to discussion. If you pretend that everyone gets exactly the same benefits from their tax payments regardless of the amount paid, then you give the progressive tax proponents an opening to weaken your argument.
Note that I support your argument. That makes me a lousy candidate to argue against it. But I know the arguments are out there. One I hear is that government subsidies such as farm subsidies favor wealthy business owners over workers. (Of course, then I argue that we should cut all subsidies, starting with farm subsidies. That tends to send many "progressives" into apoplexy, ending the discussion.)
Even when it comes to seemingly neutral services like fire and police protection or road maintenance, they’ll argue that people with more wealth have more assets and thus need more protection and maintenance. (The more cynical will argue that people with more wealth get better quality protection as well.)
I just know that "everybody gets the same beer" isn’t as simple as this analogy makes it.
The assumption that everyone gets the same amount of beer is not necessary.
The only necessary assumption is that the amount of beer everyone gets does not change from before to after since: "The ten men drank in the bar every day and seemed quite happy with the arrangement". If the ratio of beer-to-payment was acceptable before hand then as long as that ratio does not change, then it should be acceptable afterwords.
Once you make that assumption everything else flows.
% of Bill:
Patron            Before        After      Difference
1-4Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0%Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0%Â Â Â Â Â Â Â Â Â 0%
5Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0%Â Â Â Â Â Â Â Â Â Â -1%
6Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 3%Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2.5%Â Â Â Â Â Â -0.5%
7Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 7%Â Â Â Â Â Â Â Â Â Â Â Â Â Â 6.3%Â Â Â Â Â Â Â -0.7%
8Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 12%Â Â Â Â Â Â Â Â Â Â Â Â Â 11.4%Â Â Â Â Â Â -0.6%
9Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 18%Â Â Â Â Â Â Â Â Â Â Â Â Â 17.7%Â Â Â Â Â Â -0.3%
10Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 59%Â Â Â Â Â Â Â Â Â Â Â Â 62%Â Â Â Â Â Â Â Â +3%
After the reduction in the bill the new payment proportions are even *more* progressive than before. The only situation where this even balances out with regard to beer allocation is if Patron 10 got 3% more beer than before.
If anyone should be complaining about the beer-to-payment ratio it should be Patron 10, he’s now paying for more of the beer even though he didn’t get any more.
[nit]I should also note that there is a dollar missing from the example: 2+5+9+14+49 = 79, not 80.[/nit]
When progressives (sic) argue that the wealthy receive more benefits from taxes than do the poor I generally see that as a reason to make more people rich.
Yu-Ain Gonnano, thanks for the break down of the numbers. It helps to look at these things from a number of different angles.
It’s always interesting to force progressives (sic) to go down into the details of how they would rectify this use of taxpayer resources. If a wealthy family’s house catches fire should the fire department just get everyone out and let it burn and only protect the cabana since it’s still probably a better house than 2/3 of the world’s population lives in?
Much fun ensues.
AH! All of you are missing the point of the arguement. Start with the most important point. The beer. Ok, I’m the logger, hence red neck of the bunch, so I’ll make it easy to understand or I’ll get lost .
Ten people, $100.00.
Averaged is $10.00 spent on each. No matter where the money comes from. So that is two mugs ( pints ) or four glasses. That is simple math. I doesn’t allow for 3% or any such configuration. The most that you can divide the benifits is by 40 ( glasses). You can knock your selves out with the math, But keep it simple.
Ten people, $80.00.
Same 40 glasses. Equals $2.00 a glass.
Therefor the main point is where do they drink? There is no place I know that a glass of beer is that cheap.
Now I am in Canada, we like our beer. Hell, one our most popular brands is called "Canadian". So if anything this is an arguement for more immigration . Not tax reform. …Wait, is immagration a form of tax reform? ….Bar keep! Another round.
Great piece, thanks for sharing.
I just know that "everybody gets the same beer" isn’t as simple as this analogy makes it.
Martin,
Why would you expect everybody to “get the same beer?” I don’t know if it’s ever the same for the guys, but when a few ladies and I go out for a few drinks we run up a tab.
When we are ready to leave we pay the tab, usually chipping in equal amounts. Did we all drink the same amount? No of course not, and I can easily say that I usually get the short end, although I have no complaints. It’s worth paying a little more to not be hassled digging into my purse for every drink.
Now that has little to do with this discussion other than to point out that there is no basis for saying that "everybody gets the same beer." It might be the case however, but likely only if it was agreed upon ahead of time. Taxes don’t work that way either.
Just like we all will drink different amounts of beer over an evening, we all get different benefits from the taxes we pay.
I really enjoyed this piece :-)
Just like we all will drink different amounts of beer over an evening, we all get different benefits from the taxes we pay.
Ah, but then that’s exactly how some progressive taxation proponents will justify the behavior in J.A.’s story. "Well, he didn’t deserve more money back, because he got more for his money!"
Seriously, I think you’re being rational. People who support the nine men robbing the tenth don’t think rationally. The arguments I’ve had with these people usually come down to grievance: if I can claim any grievance or unfairness, that negates your logic and rationality.
Here is the answer to How Tax Cuts Work.
Martin is right, there are many arguments as to why this would be wrong. Now it is absolutely correct that if everyone gets the same cut percentage wise, that the richest will make more money back, considering they are dealing with higher numbers. However, the progressive tax advocate would argue that the rich guy doesn’t need the 10 dollars, so why should we cut taxes for him when the poor need the money more. He should still pay 59$ and everyone else should bay the 21 dollars left. Then everyone gets a fair amount back and the rich guy doesn’t suffer for it because he still has more than enough to make ends meet.
Being a flat tax guy myself, I see where you are going. However, Martin has a very valid point.
It’s still a nice piece though.
The only real problem with the example is that it doesn’t include the fact that the men on the bottom pay less than nothing: they get a credit back.
But the story isn’t all that helpful from the perspective of where anyone stands on tax policy. Government is run on the tab of the wealth of the entire country. There’s simply no way to get around the fact that the people that have most of that wealth will pay the most money and get the most benefit from tax cuts. Note that anyone who supports, say, the Iraq war, implicitly already supports the idea that rich people must be conscripted to pay for this war, no matter what outward attitude they claim to have about the unfairness of progressive taxation. No one else can afford to pay for it, and it’s money already spent with the assumption that they will.
And then there’s the problem that all discussion of tax policy these days is a discussion essentially about tabs already run up. Tax rates today, whether higher taxes proposed by Democrats, or lower taxes proposed by Republicans, are essentially all meaningless to the long term tax burden. No matter what rate you choose to tax presently, the final tab stays the same, and has to be paid up at some point, and will be paid up by the people that make the majority of the income.Â
All tax debates today come down to whether it’s financially wise to tax now or borrow money so that we can tax more, plus interest, later. I’m honestly not sure what the right answer is there: it’s a highly technical question with a lot of uncertainty. But it does make all the hyperventilating about high taxes sort of silly. Taxes today are dramatically lower than they would need to be to pay the tab. There’s simply no way for that state of affairs to continue forever.
It’s also worth noting that the taxes we’re talking about these days are peanuts compared to how high they used to be. Even Obama’s proposed tax hikes still don’t bring them into the range they were under Clinton, and we didn’t exactly have mass flight of the rich or economic disaster during that era.
In fact, the reality is that we have a pretty good measure of how much benefit the rich get from living in the US simply by observing their behavior. They are taxed far more than anyone else: getting taxed at all is big negative to earning income here. But by and large they do stay, and did so under far far higher tax rates, which means that they think it’s overall worth the price tag. And indeed that even the highest rates envisioned by Democrats today are likely still a bargain.
That’s not to say that the story has nothing to teach us: tax more and more and more and those really are the consequences, as with any tax: you create disincentives for the taxed item. And when that’s income, that means less income will be earned here. It’s inevitable.
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Sandi & Martin. You two seem to have a better grasp of what is being hinted at here. Yet, I am finding an underlying supposition thst the rich man will be drinking more then the rest. Value for the monies paid ect.
Taken to the silly ( my world, thanks) It would sudgest, to succeed …drink more beer. Also, two mugs each wouldn’t get the first nine drunk enough to beat up #10. So you may have a point. They get #10 drunk and roll him. A fine late night tradition. On the other hand. The first four are poor not stupid and know what side their bread is buttered on and would defend #10…or at least take turns rolling him night after night. After he is so blotto to recognise them. So back to the important question . Where is the $2.00 a glass beer?
 Also as our election, here north of the 49th gets ramped up, it is being campaigned by several parties to end income tax. Instead, increasing our "Goods and Services Tax" (GST ). Hence, tax on what you spend, not what you make. The whole tax system is moving that way with a $5,000.00 per year accumlating limit, tax free account. There would be no tax back for contributing. The funds earned in the account would grow tax free. Any amount removed from the account would increase the contribution limit by the same amount in the future. This little relive is accually massive when you start to play with compounding. It only makes sense to me if they are going to eliminate the income tax act of 1916 soon.Â
 Oh, good luck on your election. Ours will be over in a month. Why does it take a year in the States?
This whole idea might make more sense if the US government had not just proposed a one trillion dollar bailout for the wealthy.
Bad,
Even Obama’s proposed tax hikes still don’t bring them into the range they were under Clinton, and we didn’t exactly have mass flight of the rich or economic disaster during that era.
The problem is that tax policy does not take immediate effects. Their is a lag associated both with the roll out (a one time hit isn’t as devestating as a recurring hit: it’s a cumulative effect) as well with the response (you don’t send 20,000 jobs overseas overnight).Â
The problem is that no one really agrees as to how long this lag is. So, first, just because we didn’t have mass exoduses during his term doesn’t mean anything. Second, it’s not usually the rich that would move, but rather the jobs that would be moved (off-shoring) in order to save money and increase the owner’s income to offset the tax hike.
There’s simply no way to get around the fact that the people that have most of that wealth will pay the most money and get the most benefit from tax cuts.Â
No one is saying that everyone should pay the same raw dollar amount. We are rather OK with the rich paying more.  The rich will pay more as 10% of $500k is a lot more than 10% of $50k. Ten times as much, in fact.
All tax debates today come down to whether it’s financially wise to tax now or borrow money so that we can tax more, plus interest, later. [snip] …as with any tax: you create disincentives for the taxed item. And when that’s income, that means less income will be earned here. Â
Not necessarily. It depends upon which side of the laffer curve you believe us to be on. Reducing tax rates will increase raw dollar revenue if doing so increases the incentives to make a greater income enough to offset. As the old saw goes, half of something is better than all of nothing.
mikeca,
This whole idea might make more sense if the US government had not just proposed a one trillion dollar bailout for the wealthy.
That’s only if you think the point was to protect the wealthy and it’s benefit to the the middle class shareholders and borrowers was just a side effect, or whether you think the point was to protect the middle class shareholders and borrowers and the benefits to the wealthy is the side-effect.
Largely, I don’t think the .gov should be doing either one, but…
The moral of the story is that the system is perverted – arguing that the symbolism isn’t accurate and it needs to be more convoluted to justify attacks on any of the men in the name of "fairness" just enhances the central point.
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