Our Tax System

mabdoo

mabdoo

Cathlete
Has anyone seen this? Kind of interesting.

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.
 
This is brilliant. But disturbing too, because it's true, and people still complain about the "rich not paying their fair share." They just don't appreciate the fact that the more well-to-do people *earned* their money and should be allowed to keep more of it, yet they end up shouldering the tax burden for 90% of the rest of the population.

Most rich people weren't born that way, it wasn't inherited, and in fact a lot of them used to be what is considered poor. Even if they started out middle-class, they didn't have to stay there, they moved up. Rich people make more wealth for the whole country; everyone benefits. Seriously, when was the last time you got a job from a poor person?

I'm curious why this thread hasn't gotten any discussion, especially now so close to the election?
 
According to Snopes, the above wasn't created by Kamerschen. It seems they don't know who wrote it.

http://www.snopes.com/business/taxes/howtaxes.asp

Regarding taxes and this election, I've been reading so much about issues and numbers, I'm going cross-eyed. One site that compared both tax plans did it's best to explain things, but ended with this:

"The only comfort is that they are both politicians, so there's a good chance they are lying."

:D
 
interesting, but...

There are a number of fallacies in the presentation of the scenario:
- First of all, there is no set total bill that the 10 men must pay. The bar owner govt has each man pay as a % of his ability to pay based on income independent of what the other patrons are paying.
-Unlike a real bar, the men who pay more do not have the option of NOT buying beer, even if other patrons are getting it cheaper.
-If all men got a large beer discount, why would they argue that man 10 (who got a lower reduction in % terms, even with $10 disc) benefited more? he still pays 3-14x more for the same beer? Seems like the only men complaining about cost of beer would be man 10 and maybe #9, the other 80% wouldn't care about the unfair arrangement.
-The govt gives beer "discounts" b/c it knows that extra funds not used on beer will be spent on other goods and services that would eventually benefit the govt., so the 20% beer discount was in the bar owners and beer drinker's best interest.
-The 10th man may not have many drinking buddies and may be unpopular, but he's gonna keep drinking beer and he's not going to be moving abroad. He's going to become really close buddies with the bar owner and find a way to get beer for less.
 
YasBeFit said:
There are a number of fallacies in the presentation of the scenario:
- First of all, there is no set total bill that the 10 men must pay. The bar owner govt has each man pay as a % of his ability to pay based on income independent of what the other patrons are paying.
-Unlike a real bar, the men who pay more do not have the option of NOT buying beer, even if other patrons are getting it cheaper.
-If all men got a large beer discount, why would they argue that man 10 (who got a lower reduction in % terms, even with $10 disc) benefited more? he still pays 3-14x more for the same beer? Seems like the only men complaining about cost of beer would be man 10 and maybe #9, the other 80% wouldn't care about the unfair arrangement.
-The govt gives beer "discounts" b/c it knows that extra funds not used on beer will be spent on other goods and services that would eventually benefit the govt., so the 20% beer discount was in the bar owners and beer drinker's best interest.
-The 10th man may not have many drinking buddies and may be unpopular, but he's gonna keep drinking beer and he's not going to be moving abroad. He's going to become really close buddies with the bar owner and find a way to get beer for less.
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1. I'm not sue how this is a fallacy. This is exactly how I pay taxes. My tax bill is independent of what others are paying and is based on my income and *ability* to pay.

2. Do I have the option of not paying my taxes?:p Please tell me how I do this.:)

3. You do realize that those that pay less taxes complain about the tax rate of those who make more all of the time, right?

4. Those who are in the best position to spend any *discount* and stimulate the economy are often not the ones getting the *discount.* Lots of discounts are often given to those who *need* the money just to pay bills. Also, in terms of tax relief, see #3 above.

5.The 10th man may not *move* himself abroad but he certainly may move his business and the manufacturing of any goods abroad and that hurts the 1-9th men who may work for him and/or wish to distribute his goods. It would be awfully short-sighted to not recognize that taking more and more of the 10th man's money increases the likelihood that the 10th man will want to look for some alternative to keep more of his money.
 
pippa said:
1. I'm not sue how this is a fallacy. This is exactly how I pay taxes. My tax bill is independent of what others are paying and is based on my income and *ability* to pay.

2. Do I have the option of not paying my taxes?:p Please tell me how I do this.:)

3. You do realize that those that pay less taxes complain about the tax rate of those who make more all of the time, right?

4. Those who are in the best position to spend any *discount* and stimulate the economy are often not the ones getting the *discount.* Lots of discounts are often given to those who *need* the money just to pay bills. Also, in terms of tax relief, see #3 above.

5.The 10th man may not *move* himself abroad but he certainly may move his business and the manufacturing of any goods abroad and that hurts the 1-9th men who may work for him and/or wish to distribute his goods. It would be awfully short-sighted to not recognize that taking more and more of the 10th man's money increases the likelihood that the 10th man will want to look for some alternative to keep more of his money.
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Pippa-
1.The fallacy in the scenario is that the there is a set amount that the govt is trying to collect and that if the any of the men, 10th or 1st, don't pay X amount then all the others will pay more in order to pay a fixed bill.

2. Obviously, none of the men have the option of not paying the beer tax so the fact that the 10th man will "drop the tab" on the others isn't possible.

3. Yes, I don't see how people paying less than those at the top complain about the % paid or % discount when they are paying MUCH more in total dollars. Is it a jealousy thing or are most people really bad at math?

4. Those in best position probably don't *need* the discount to purchase more goods/services as the assumption is they have plenty of disposable income even after taxes. But, I agree that giving a discount to those who are using it just to get by, i.e. subsidizing their low income, doesn't have the stimulation effect.

5. I agree that making the 10th man pay "too much" (whatever that amount is) will make him look for alternatives for investing his money; but, its also shortsighted to think that the most of the 10th man's income is subject to "individual income tax" and that he doesn't already shield a large %.

Even as I agree with many of the points you made, I still don't understand math-wise how a tax "discount" policy that benefits the 90% of people that are NOT man #10 is a bad thing.

Perhaps the govt should give everyone a break, let us all keep more $ in our pockets so that we can buy more goods and keep man #10 in business.

My tax discount would go directly to Cathe.:p
 
Thank you for posting this. Some people really have no idea of the consequences if you start imposing even higher taxes on those who are already paying a huge amount of the tax bill in the country. Do I wish I made that much? Of course I do. However, those who are constantly complaining how the rich have it easy are often the same people who are always wanting the goverment to do everything for them. You need to make things happen yourself. Yes, there are plenty of companies whose CEOs make way too much money, however, these are also the same companies who provide jobs to everyone else. Don't think by taxing these companies we are "getting back" at them; they will just let workers go and quit giving raises. The hard-working middle-class are the ones who lose in the end.
 
Well, I would say guy number 9 and 10 certainly will get a tax deduction on the beer that they are paying which will bring down what they are actually paying by 30 to 50 % depending on their tax bracket. Let's face it, those who make or have a lot more money also have tax advisors which enables them to take advantage of tax loopholes, deduct expenses that the normal working stiff cannot and have their money in tax shelters.

I don't think anyone wants to get back at those companies. Getting back for what? Companies are not welfare instutions.

On the other hand, the notion that companies or small businesses will create jobs because they get a tax cut is ludacris. As someone who was a consultant in start up and increasing efficiencies for companies, I can guarantee you that companies don't start up and businesses are not in business to create jobs but to make profit. They won't hire because get a tax cut, they will hire because they need additional work force / staff due to increased demand.

Let's say as a small business I make $ 200,000 in profit and let's assume the tax rate is 35 %, so my taxes are $ 70,000. Let's assume they are cutting the corporate taxes to 30 %. Now my tax liability is $ 60,000. That gives me $ 10,000 more than before. $ 10,000 to create a job?? Who really thinks that will create a new job?

Aside, it is absolutely misleading to say that we have the second highest corporate tax rate in the world. What is conveniently left out is the fact that those countries with the lower corporate tax rates for one don't allow the same depriciation of capital assets and tax deductions as the US allows, meaning that in the US the tax is levied on the adjusted profit / income and the tax percentage depends on the profit bracket, corporate tax starts at 15 % for up to $ 50,000 profit (adjusted according to deductions) up to 35 % for profits over $ 18,333,333.

With all the tax loopholes, tax shelters and deductions, for a small business to "make" $250,000 in net profit, after deducting all expenses like employees' pay, supplies, truck/car, fuel costs, and other legitimate business expenses that probably would be a business with a revenue of $ 1 Mio plus.

What is also conveniently left out is that the cited countries also have sales taxes of up to 21 % on goods and services. Not to mention that those cited foreign companies also have to pay much larger payroll taxes, medical insurance, social security as well as illness benefits, maternity benefits, longer vacations, etc. I would doubt that any US company finds that attractive, despite of the lower corporate tax rate.

Citing the lower corporate tax rates of other countries is comparing apples and oranges. There was an interesting article in smartmoney magazine a while ago. http://www.smartmoney.com/investing/economy/high-corporate-tax-rate-is-misleading-22463/
 
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fit_fairy said:
Woo hoo Carola's back!! Get em girl!!
;)
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Get who? And why?

Carola, I am happy to see you back, too! :) I did just want to comment about the tax break for companies that you had mentioned above and just wanted to add another perspective. While I totally agree that companies are out to make a profit (I think we can agree that we all are in some way), I wanted to mention that those independent entreprenuers are able to do more for their employees with those tax breaks. With the Bush tax cuts DH and I had health insurance for the first time because the owner could finally afford to offer it to his employees. A couple of years after that he was able to give DH a substantial raise that made it possible for us to buy the house we live in now. DH is pretty worried about what may happen if those taxes go back up. He is safe because he brings most of the business's money in, but his boss will have to let people go, and he has a pretty small company. These taxes are murder for small businesses.
Also, as far as outsourcing is concerned, the simple truth is that businesses wouldn't send their manufacturing/productions facilities overseas if it was more expensive for them, but I think that they should be taxed out of their eyeballs for taking American jobs away. Maybe taxed out of other places too. ;]
It is so fun to have you back. You post logical and educated statements and even though I don't always agree, I totally appreciate what you say because of how you present your thoughts and feelings. You are a breath of fresh air. Where have you been?

One other thing - I am not from a seriously wealthy state like what's in the NE, but I wanted to agree with Govtgirl that most people aren't born rich, they work to get there. Almost all of the people I know (in the midwest) come from humble beginnings and worked hard and sacrificed to get where they are. And just because you are born rich it doesn't make you evil, either. I would like to have something set aside for my kids, and I don't want anyone looking down on them because I did look out for their financial future.

Missy
 
This really does nothing to explain our tax system. If only it was that simple. Unfortunately, it is not. The very richest Americans (and by that I mean those in the top .1% of earners--definitely not anyone here on this forum) have lawyers and lobbyists to ensure that they can benefit from government giveaways and tax breaks. Money buys access to power, unfortunately.
I don't believe that people want to see the very wealthy pay their fair share out of some sort of seething resentment of the rich. I just don't think it is good for the country to continue on this path of concentrating wealth to the top tier. A strong, stable middle class is what keeps the economy going and our taxes pay for vital services such as police departments, fire departments, libraries, hospitals, etc.
And to say that the rich got that way because of hard work ignores the fact that there are many who never get rich but work hard every day too. At any rate, luck always figures into people's fortunes or misfortunes in some way and to some degree. I am comfortable and I feel that I work hard, but I cannot deny that I have had some luck in life in one way or another. Most of us who are doing OK have. The "self made man" is something of a myth.
 
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