THE TAX SYSTEM EXPLAINED IN BEER

Note from Gary: No explanation from yours truly necessary!

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 ball.

“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 men would 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 realised 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 a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).

The sixth now paid $2 instead of $3 (33% saving).

The seventh now paid $5 instead of $7 (28% saving).

The eighth now paid $9 instead of $12 (25% saving).

The ninth now paid $14 instead of $18 (22% saving).

The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 saving,” 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 benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax 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 their 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 government ministers, is how our tax system works.

The people who already pay the highest taxes will naturally 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.

ANONYMOUS

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible…

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9 replies
  1. Vesel says:

    Good story, but the difference between drinking beer and making money from business is in the fact that the rich man can stop drinking beer, but he can’t stop his business (otherwise his wealth will vanish quickly). The rich man can drink beer some other place, but he needs to keep drinking, because the rich man is the Thirstiest of them all.

  2. Wisdom Seeker says:

    Gary, I’ve been a big fan of your work and a loyal reader since 2006-2007. You’ve helped me avoid losing a lot of money, and helped me make a little as well. But this article of yours is bogus.

    The analogy is bogus because it presumes that the only “tax” is the income tax. This analysis totally fails because it neglects to point out that the 4 poorest, and the 4 above them, pay a disproportionately large share of the sales tax, social security and medicare tax, gasoline tax, and more. I agree that our genuine producers shouldn’t be taxed so hard as they are nowadays, but the little guys are up to their eyeballs in government-approved expropriation as well. The real problem is with the paper millionaires who never produce a dime of real wealth while expecting to be bailed out of all their mistakes!

    Let’s take a more realistic look at the Beer Bar analogy. Suppose there were 100 men at the table, of which one was Warren Buffett … or one of his billionaire buddies, most of whom do no real work and have in fact been net economic liabilities for the past decade, merely profiting at public expense by shuffling financial paper around and then getting Congress to pay off their losses at the expense of the 99.

    Among the 99 others are Warren’s well-known secretary and a bunch of normal workers from the companies Warren “owns”.

    Odds are high that when you add up ALL taxes against ALL income, Warren would be the one paying the SMALLEST fraction of his income in overall taxes! He’s on record showing that he only pays 10-15% or so in tax on his total reported income. And he doesn’t even realize most of his “growth in wealth” as income … it’s mainly “unrealized capital gains”. So looking at his growth in wealth, the actual percentage that is taken by government is far lower than even 10%. Percentage-wise, Warren doesn’t pay much in sales tax, gas tax, FICA, medicare, etc. because those are peanuts for a guy with $60,000,000 in reported income.

    Meanwhile, even the bottom-earning guy in Warren’s organization pays 5-10% in sales tax, a healthy chunk of income for “transportation” going to gasoline taxes, another healthy chunk in property tax (either directly or embedded in his rent), another 14+% in FICA and medicare taxes (when properly including the “employer” contribution, which of course would otherwise be part of his salary, but no one talks about that), and so on.

    It’s true we are taxed to death, but we are ALL taxed to death… except for Warren and his 0.1% buddies and those lucky ones who don’t need to worry about unemployment because they can simply live off lightly-taxed dividend and bond income, while accumulating “unrealized capital gains”…

    We do need a fair tax, or a flat tax, but only if it’s the ONLY tax.

    • gary kaltbaum
      gary kaltbaum says:

      All good points…but you were taking it too literally. I didnt write it but I think it was more to point out what potentially happens when you take everything from one group and give to another. We can go back and forth for weeks going through numbers. And I agree, would love to get rid of all corporate welfare, get rid of all deductions and go to something flat…maybe 2 or 3 levels…but that’s too easy for a blob of a government that loves things being complicated. Simple means understandable and they dont want Americans to understand what is going on.

      Lastly, Buffett is a terrible example to compare all this to. He is an outlier as far as his earnings.

      • Wisdom Seeker says:

        Thanks for the reply. I wouldn’t have gotten so excited, except that I can’t even count the number of times I’ve seen folks who should know better, folks with brains and high incomes, saying the tax system is unfair and only quoting income tax stats. As if there weren’t all those other taxes, most of which hit the lower income folks a lot harder. I’m glad to see you’re above that misunderstanding!

    • KM says:

      Um, I think you’ve missed the point entirely. This IS a discussion of the income tax code, and has nothing whatever to do with sales or property taxes. If you wish to discuss sales taxes, or property taxes, then I still feel your belief that the poor are disproportionately taxed is way off base.

      Let’s say a poor man earns $30k/yr. He’ll be income taxed at zero, and sales taxed at 5%(ish). He can’t afford a very nice home/neighborhood on that much income, so his property tax will be very low, as well – even though it may well be in the same town, with the same tax rate as the rich man. (let’s say 5% for ease of math.)

      Now lets say he blows his entire income on property taxable, or sales taxable expenditures, with no savings. He earned $30k, and spent $30K, Sooo 10% of $30k = $3,000. for an annual tax bill on all counts. (10% of his total earnings.)

      Now here’s the rich man: He earned $300k/yr. he was income taxed at 30%, and sales taxed at 5%, just as the poor man was. He can afford a nice home, in a nice neighborhood on that much income, so his property tax will be very high – even though it’s in the same town, with the same 5% tax rate as the poor man.

      Lets say he blew his entire after income-taxed income on property taxable, or sales taxable expenditures, too. He earned $300k (minus the 30% income tax of $90k), allowing him to spend $210K. Soooo 10% of $210k = $21,000. for an annual spendable tax bill, in addition to the $90k income tax, makes for a total of $111,000 on all counts. (Well in excess of 30% of his total earnings.)

      So, just how do you figure the poorer man is paying more? Certainly not in percentage of his income, and Certainly NOT in real dollars.

      There seems to be another plane on which you Robin Hood types seem to live. One in which percentages don’t count, and real dollars don’t count. All that counts is the feelings of the people who want something they didn’t earn. That guy earning $300k/yr is NOT sitting home watching TV at 6:00 PM every night. He’s working nights and weekends, and from home, and barely seeing his family. He’s killing himself to get ahead, and the 9-5 guy is sitting on his couch every evening, griping that some rich bastard is raking it in at the little guy’s expense, because he has to pay the same sales tax and property tax rate? On what planet?

      You’re way off base here. I’ve been dirt poor, and my husband and I worked ourselves out of poverty, with ridiculous amounts of hours worked, until we finally broke that $100k earnings ceiling. Suddenly, we’re the bad guys who aren’t paying enough?

      You guys LOVE dragging out Warren Buffet as your example, because no one could possibly feel sorry for some guy worth that much money, but the reality is that it’s the guys earning a couple hundred thousand a year that will be the ones shouldering the burden of all these Robin Hood schemes you keep coming up with. Warren is ONE GUY. Even HE does not have enough money to pay off the National Debt, and that means that a lot of us lesser beings will be on the hook for it.

      Quit telling yourself that the rich are bad guys, and the poor are just unlucky. Much more likely, they’re just lazy. I was poor, and now I’m not. Not because of some do gooder like you, who thinks I want Warren’s money. I didn’t then, and I don’t now. I only want a CHANCE to earn more money. Hard work, and a good attitude is all it takes to work yourself out of poverty, and it works for all who try it. Demanding money from rich guys is a losing proposition for both the rich and the poor.

  3. Gene Lee says:

    nice analogy, and our tax system has always been this way but just getting worse and worse. In addition to the tax inequalties, more and more the government is bombarded with problems from all of the lobbyists, off-shore tax havens, and welfare. I recently read the “financial crisis inquiry report” (find it in amazon) and I’m just speechless with how the bankers got away with murder (and the government agencies allowed it to happen). Many warning signs but everyone was ignorant. After reading it, I truly think that there is no way the USA will recover from this. As long as politicians are controlled by Wall Street, it’s going to be long path to hell.

  4. Kevin says:

    — simple enough so that the slowest among us can understand. Only those blinded/deaf through hatred will not understand.

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