The Tax System - Explained With Beer

This is an email currently going around, claiming to explain the tax system...


The Tax System - Explained With 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.

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 then 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

When I snapped back at the sender for this email's premise, I was told it was to be taken as a joke but I disagree. It's to be taken as legit logic, as in the system isn't fair. Well, it's obvious the system isn't fair. As soon as your government allows currency to be created and has immediate debt attached to it, fairness is out the window.

The Tax System - Explained With Beer, is probably one of the worst trains of thought I've ever read. It obviously make a case for a generalized tax bracket across the board. No doubt this Professor of Economics is among the top 5% in America who make above 250K and who would see their taxes increase with Obama's plan. Bitterness perhaps? This is the problem with borrowing money in a monetary system with immediate debt attached to it. The poor cannot work enough hours to get ahead and the rich are always 100 times better off than the poor no matter what happens. What? Just 100 times better than the poor (aka the worst)? Geez, with everything the rich does for us poor - ie. job creation, economic growth, innovation via their corporations; they should certainly be at least several 100 times better off than the poor. Yeah it's tough. It's a sad state of affairs when the wealthy have to go overseas in order to be thousands of times better of than the people they employ in those countries. Mr Economist is right, where's the justice?! They should be able to do that in their own backyards rather than "visiting" third world countries.

WOW!!! Star and Flag. Even I, a lowly redneck from Tennessee, even understood that.

One other thing our Economist forgot to account for are the relative benefits of being Rich.

The First four men lived in shacks.
The fifth man rented a small apartment
the Sixth man rented a larger apartment
the Seventh man owned a condominium
the Eigth man owned a small house
the Ninth man owned a large house
the Tenth man, the wealthiest, owned a Mansion, two vacation houses, all with pools and other benefits, German and Italian cars, his business, shares in other peoples business and a couple of Senators and Congressmen.

Now in a truly Socialist country the Tenth man would have to give most of his profits over to the Government for redistribution to his fellows.

reply to post by StrangeBrew


"Bar stool economics" i love it. Now people know the meaning. McCain would do well explaining it this way at the next debate.

reply to post by StrangeBrew


And also you can find the tenth mans money and business in Ireland. That will America out.

That is a brilliant post.



I'm gonna show my friends

Except they forgot to mention, only the long term unemployed pay no taxes. Anyone earning over $3000 a year pays federal income tax. And the tenth guy... he owns the bar, the brewery, the businesses that employ the other nine, and the mortgages on all their homes. From his bar tab, he claims a tax deduction for "employee benefits", another for "entertainment expenses", then writes off the 4 guys' drinks as a "charitable donation". He then gets a huge tax return that's funded by the other nine guys and promptly deposits it in an offshore account to avoid paying taxes.

[edit on 10/29/2008 by mythatsabigprobe]

I think that one other thing they forgot to mention;

In the real world, there are;

10000 of the 1-4th level (poor men)
8500 of the 5th level
6300 of the 6th level
3200 of the 7th level
1200 of the 8th level
100 of the 9th level

and
2 of the 10th level;

So, those who make the most, are carrying most of the the social burden through taxes for those who get taxed nothing.

I would love to see our beloved President Bush try and repeat this!

lol

It would be great youtube material!

This is completely incorrect...and out of context.
First off, the examples listed infer that the rich are paying 60 percent of their "individual" income taxes. This is not true; they are paying 35%, which is the highest of all of the 6 tax brackets that currently exist. Now even that 35% is rarely paid by the wealthiest persons, the rich can take advantage of tax loopholes, including one that allows them to pay the capital gains tax rate of 15 percent instead of the ordinary top income tax rate of 35 percent.

Recently Warren Buffett (the third-richest person in the world) cited himself as an example. Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent. Buffett said that was despite the fact that he was not even trying to avoid paying higher taxes. "I don't have a tax shelter," he said.

Now lets talk about context, the 60 percent paid by the wealthiest man outlined in the horrific example, is to depict the total amount of income tax revenue received. Therefore, stating that the Top 5 percentile of wealthy Americans in this country make up 60 percent of the entire income tax revenue received. The top 5 percent own 60 percent of all wealth. So, now that you can see that the Top 5% owns 60 percent of our nation's wealth, you should also understand why they also make up 60 percent of the yearly income tax revenue

Also, the top 20 percent owns over 80 percent of all wealth. In 1998, it owned 83 percent of all wealth.

Finally, if you tax someone making $40,000 a year 25% you take $10,000 dollars from them leaving them with a windfall of 30,000 dollars.

But if you tax Warren Buffet, making $46,000,000 a year, 35% you take $16,100,000 dollars, leaving him in poverty at 29,900,000 dollars. And as I said earlier, with the tax breaks and loopholes they see, they end up paying only 17% compared to the 25% the 40k a year is taxed. And good luck going to a non-third world country, offering a different system or at a lesser rate; England is taxing their rich higher at 40%, China at 45%, Canada is the lowest at 29%, but they don't even tax those making less than $9,000 a year, period. Don’t accept these “jokes” at face value, do your research!

Oh, For The Love Of....!


This is the most shocking example of mathematical illiteracy I've seen in a very loooong time!

And I've dealt with A LOT of math Illiterates! (Most of them CPA's!)




Very well, School's in session. Pay attention.


10 people. Bar tab for beer= $100


If each paid an equal amount (Fair Share) towards the Tab, each would owe = $10

10 people X $10 = $100



However, per the provided example, 4 of those folks were required to pay nothing, therefore: 10-4= 6.

6 people were left to pay a $100 beer tab.


If each of the remaining 6 drinkers were to pay the same amount toward the bill, each would have owed aproximately $16.67

$100/6 = $16.666666666... (rounded off to : $16.67)



Now, instead of dividing up the bill equally amoung the remaining 6 drinkers, they decided to pay based on their percived ability to afford the expense. The named "Professor of Economics" thusly likens this method to the current income tax system.


Therefore the break down of the original $100 dollar tab looked like this:


Drinkers 1-4 pay - $0 or 0% of the tab
Drinker #5 pays - $1 or 1% of the tab
Drinker #6 pays - $3 or 3% of the tab
Drinker #7 pays - $7 or 7% of the tab
Drinker #8 pays - $12 or 12% of the tab
Drinker #9 pays - $18 or 18% of the tab
Drinker #10 pays - $59 or 59% of the tab

Total $100 or 100% of the tab



Got that?
Pay attention to the Percentages
paid by each of the drinkers. This is where the good Dr. Kemerschen "falls off the wagon"!


In the example, the barkeep, in a show of generosity, gives the drinkers a $20 "rebate". This effectively reduces the beer tab to $80 for the 10 drinkers.

$100 - $20 = $80


Of course, since 4 of those drinkers didn't pay anything in the first place, the remaining 6, paying customers are left to divey up the windfall.

If the drinkers would have stuck to their original plan, as they devised for apportioning the bill, the split would have been easy;


Each payor would have received a portion of the refund equivalent to the portion (percentage) of the bill he paid. Thus:


Drinkers 1-4 paid $0 get $0 back final amount paid = $00.00
Drinker #5 paid $1 gets $0.20 back, final amount paid = $00.80
Drinker #6 paid $3 gets $0.60 back, final amount paid = $ 2.40
Drinker #7 paid $7 gets $1.40 back, final amount paid = $ 5.60
Drinker #8 paid $12 gets $2.40 back, final amount paid = $ 9.60
Drinker #9 paid $18 gets $3.60 back, final amount paid = $14.40
Drinker #10 paid $59 gets $11.80 back, final amount paid = $47.20
Original Tab $100 minus $20/20% rebate = final tab $80.00




The good doctor tried to mislead us into believeing in the inequity of the tax system by erroneously attempting to equally divide the $20 refund offered amoung 6 recipients, when, in fact, those recipients, by virtue of the fact that they had not equally contributed to the expense (the original bar tab, or by analogy, the income tax) were not equally entitled the the same refund.


The tax system does not work that way.

Our tax system is geared such that the more you make, the more you (should) pay. And the more you have paid, the more you should get back, when it is due.


Ah well, I guess it is true;

PHD = Piled Higher, Deeper!