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.
What happens to 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 (using percentages) 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 paying customers 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. Or maybe just a different state!
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
Blue text added by GregB
Starting Score: 682 EQ, 663 TU