Our Tax System Explained: 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 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 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. > > David R. Kamerschen, Ph.D. > Professor of Economics > University of Georgia > > For those who understand, no explanation is needed. > For those who do not understand, no explanation is possible.
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lol, oops. just saw it now for the first time.
This is exactly why whenever people talk about tax cuts for the rich I correct them and tell them they are tax cuts for those who pay the majority of taxes.
Unfortunately living in this country and paying nothing to the Federal Government isn't enough for some people.
It really is just childish logic and ethics. But oh well, if they were intelligent to begin with they wouldn't be the ones asking for a hand out.
What do you say to this?
Progressive version:
Suppose that every day, ten people go out for beer. A lot of beer. If they paid their bill the way fiscal Conservatives WANT us to pay our taxes (21% rate for everyone, which would amount to an enormous tax reduction for the richest and the largest tax increase in history for the poorest), it would go something like this:
The first four people (the poorest) make $50 a day and would pay $11.50, leaving them with $38.50 to survive. The fifth makes $200 a day and would pay $42, leaving her with just $158. The sixth makes $300 and would pay $63. The seventh makes $400 and would pay $84. The eighth makes $500 and would pay $105. The ninth makes $1,000 and would pay $210, leaving her with $790. The tenth man (the richest) makes $10,000 and would pay $2,100, leaving him with $7,900.
So, that's what they decided to do. The ten people drank in the bar every day under this arrangement. The poor had to sacrifice birthday gifts for their children and healthcare for one member of their family in order to buy that beer. The wealthy still enjoyed their healthcare, college, 401k retirement savings, their gated home and clean and healthy organic lifestyle, and their yacht, but they couldn’t afford a second yacht because of that beer!
One day, the bar owner threw them a curve. Instead of paying 21% of their income each for the beer, they could each pay 15%! The bar owner proceeded to work out the amounts each should pay.
And so:
The first four people (the poorest, most strapped for cash) save $3 (6% savings). The fifth saves $12 (6% savings). The sixth saves $18 (6% savings). The seventh saves $24 (6% savings). The eighth saves $30 (6% savings). The ninth saves $60 (6% savings). The tenth saves $600 (6% savings).
Each of the people had more expendable income than before. But while the poorest struggled to buy just one additional teddy bear for the new baby with the savings, the rich saved enough that they actually could afford that second yacht after all! In fact, they saved many times the sum of the poor people’s income, and that was just their savings!
However, despite the additional income, not everyone was better off. Even though the beer was cheaper, the healthcare assistance for the poor disappeared, the public transportation system in America deteriorated, the country could no longer invest in medical research or fund job training centers or police stations around the country. So, in actuality, the poor, who were the financially worst off to begin with, became even worse off, despite the extra $3 bucks a day they saved. Working class people also happen to represent the majority of America. Despite the crumbling surrounding community, the small rich minority were astronomically better off! Their healthcare rates didn’t change, they kept their Lexus, they could still afford college, and although they decided against buying the second yacht, because, why would you need two?, they were able to throw even more money into derivatives!
And that, boys and girls, journalists and college professors, is how our fiscal conservatives want our tax system to work. Everyone pays the exact same percentage of their income in taxes, the people who pay the highest taxes are the only ones to benefit from a tax reduction, while the poor, struggling to get by to begin with, struggle even more regardless of whether taxes go up or down.
No one is attacking anyone for “being wealthy,” as some assert. (I wish I were rich, and I certainly wouldn't complain about my taxes if I were.) But the rich got rich in America, on the shoulders of their working class employees and using the infrastructure the working class have built and the security and structure America provides. Numerically equal tax rates do not amount to equal burden. It does not amount to "fairness." It utterly ignores the common good, and it is the antithesis of equal opportunity. The world just don’t work that way.
Nobody Special University of New Hampshire alumnus For those who understand, no explanation is needed. For those who do not understand, just think about it. You’ll get there. Doesn’t take a PhD, just some perspective.
I say it is bullshit. I've never been for a flat tax and I don't see the point of taxing the very poor because you will get nothing out of them. What I do want to see is a simple tax system, devoid of socially manipulative deductions and credits.
Honestly, my biggest issue is that half this country pays zero in fed taxes, but gets upset when the only people who do pay taxes get a tax cut. The rich got rich because of laws and stability. That is what government is formed for. No one is talking about zero taxation.
Besides, I thought we were talking about taxation and revenue generation. All these poor pity arguments have nothing to do with things. The rich deserve everything they have and should not be robbed based on a child's logic.
By the by. Professor Kamerschen did not write this. This has been variously attributed to Accounting professionals, b-school professors, economists, etc. I will not make a comment on the validity of the arguments, but when people feel the need to falsely attribute an authority to a piece of work, you should at least start asking questions.
Moral of the story, don't be poor.
BINGO
I agree, a flat tax is probably not the most logical. It's the tax breaks for special interests that frustrates the most. I'm happy to pay taxes if I get rich, but I'd hate to pay more taxes than say - other people with the same wealth as I have simply because they have been able to pay off some legislators to reduce their taxes.
My issue with tax cuts is that it gets touted as "enabling entrepreneurs". This argument assumes that all entrepreneurs are already wealthy, since the cuts end up benefiting mostly the wealthy. It would be excellent if there was a system that could guarantee equality of opportunity, but that would require too many things to be taken into consideration, and would require unnecessarily lengthy legislation as well as infrastructure (big government).
Edit: And what Connor said.
I resent tax breaks for having kids, owning a home, getting married, donating money, etc. Government should not be in the business of trying to manipulate my behavior or reward people for theirs.
Tax income and be done with it.
Thank you very much for metaphor and especially the phrase that we can apply many times during our working days and life in general
Question Ant - what's your opinion on inheritance taxes?
I'm of the opinion that inheritance is income and should be taxed as such(I actually think it should be well taxed otherwise it could lead to a system that reduces competiveness).
I think they would dip slightly, but wouldn't be gone completely. Either way if you eliminated deductions you would do the following:
Increase the % of Americans who pay Fed taxs Increase revenue substantially Decrease tax rates
Government should be agnostic and impartial.
I am against inheritance taxes.
I work my whole life, saving and investing money that has been taxed once.
I pay taxes on the gains of that already taxed money
I give that money to someone else and they have to pay a massive tax on it.
Yeah, I understand the logic with inheritance taxes. Within a couple generations a family can become insanely wealthy. But once again, we have insanely wealthy families with an inheritance tax.
Government is not in the business of making things "fair" or whatever. Government taxes income and does things that we cannot do individually. The Federal Government has limited powers, to do things that the states cannot do themselves.
As an arbitrary line in the sand, up to 10 million dollars of inheritance (per beneficiary) should be tax free. Anything above that should be taxed at a very high rate (say 90%).
This will encourage wealthy people to donate excessive wealth to charity, rather than have it rot in the government's inefficiency.
I completely agree. If I ever had kids I would most likely give them nothing. I am not a proponent of breeding weakness.
But that is my personal choice.
Although. I will propose this.
I would support a 100% inheritance tax, but the money should be taken from the person and burned. Not given to anyone, not spent, nothing. Burned.
Okay. So if I gave my kds 10m when I die, they keep it all. If I give my kids 100m, they still get only 10m and the government gets 90m. I would rather put the 90m of paper in a pile and be the first person in history to burn that much.
Ant - this constant reference to the "government", remember, the government is you and I. The government isn't some mysterious opaque entity floating in the sky. We can debate what the government should and shouldn't do, but in the end, we get to define how we want the government to operate, by creating laws and amendments.
I'm of the opinion that the government has a role to play in creating the right environment for it's citizens to flourish. ALL it's citizens (pursuit of happiness). And I also believe that there has to be someone watching out for fairness, hell even in games, you have a referee.
The inheritance in my opinion was taxed when you earned it, fair enough. As long as you hold onto it, it won't be taxed again. If it moves to someone else, it becomes a transaction, and we do pay sales taxes no?
As you mentioned, even with inheritance taxes, families retain wealth. But that's not a problem per se. If say, the ANT family over the next 5-10 generations produces the brightest and the best individuals in the country, I'm happy for them to be among the wealthiest families. This is however different from passing laws that helps the ANT family retain wealth, and ensures that anyone who wants a shot at that wealth must work for the ANT family.
Oh - I also agree that government should be agnostic.
Government is a creation of its citizens, yes, but the US government is narrowly defined and restricted, as intended by our founding fathers. If the populace wants socialism, they should be denied.
Government helps its citizens by enforcing laws, providing national defense and getting our of the way of free enterprise. Not everyone will succeed and not everyone will benefit, but that is fine. Humanity exists because of survival of the fittest and evolution. Why we want to circumvent the natural order of things is beyond me.
This country provides everything to succeed. If you do not that is fine, we will have a safety net for you, but this country is for the strong and hungry. Those who cannot succeed in this environment need to be provided for in a basic way and then ignored.
Do not punish the creators, innovators and strong for the benefit of the dead weight.
OMG
ABDEL!
Completely agree. People use the government as their criminal proxy. Theft under the guise of taxation. Sickening.
National defense - isn't that just a fancy word for fighting for Israel?
Incidentally, I totally agree with everything you've said. Socialism is a big joke.
I'm not sure how what the founders decided 500years or so ago needs to be a hard document though - I personally am of the opinion that the constitution of a country should be a living document, otherwise we end up with a religion and not a constitution. This of course is why we have constitutional amendments.
And I agree, but I see government moving far far away from the Constitution without amending it.
The problem is people want things, but don't care how they are financed. And you have politicians who want to be elected instead of telling people now.
And this living document needs guide rails. Americans are lazy, forgetful, entitled.
http://www.zerohedge.com/news/guest-post-man-tries-relinquish-us-citize…
Shocking!
I have a bit of an argument here. If you're an american who spends all his life living and working outside the USA, and then retire and move back to the USA, should you be entitled to some form of assistance (medicare/SS)? If yes, then you MUST pay taxes regardless of where you live surely.
Very true. But you can at least make sure the horse has the option to drink. If the horse chooses not to drink, that's on the horse's head.
I don't understand the living outside the US issue. It isn't as if you are paying 2 taxes. The US has a lower tax rate than most countries.
Only question really is: how low can tax rates seriously go given our military spending?
I must disagree with all this talk about inheritance tax. Firstly, I think it is abhorrent that if a person produces something that they wish to give to their posterity a law should be created to stop that. This is surely a gross violation of property rights.
There is also practical objection. Incentive to work does depend on giving things to your kids, you see this behavior all the time with college tuition. It doesn't seem prudent to assume that you will have no negative incentive effects by enforcing such a tax.
Also, if people's money will not go to a purpose they desire when they die, then the incentive is for people to spend it away in frivolous excess before they die. This would have a detrimental effect on savings and therefore investment.
If I knew the government was going to take my money upon death I would simply burn it. Giving money to the government is the worst thing you can do.
If you're rich enough to live 300x all over again.. you should pay more in taxes imo.
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