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 pay 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 decide to do. The ten men drink in the bar every day and seem quite happy with the arrangement, until one day, the owner throws 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 wants to pay their bill the way we pay our taxes so the first four men are unaffected. They will 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 realize 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 suggests that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeds 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 pays $2 instead of $3 (33% savings).
The seventh now pays $5 instead of $7 (28% savings).
The eighth now pays $9 instead of $12 (25% savings).
The ninth now pays $14 instead of $18 (22% savings).
The tenth now pays $49 instead of $59 (16% savings).

Each of the six is better off than before. And the first four continu to drink for free. But once outside the restaurant, the men begin to compare their savings.

‘I only got a dollar out of the $20,’declares the sixth man. He points to the tenth man,’ but he got $10!’

‘Yeah, that’s right,’ exclaims the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I!’

‘That’s true!!’ shouts the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’

‘Wait a minute,’ yell the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’

The nine men surround the tenth and beat him up. The next night the tenth man doesn’t show up for drinks, so the nine sit down and have beers without him. But when it comes time to pay the bill, they discover something important. They don’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.

Via