Suppose that every day, 10 men go out for beer and the bill for all 10 comes to $100.00.If they pay their bill the way we pay our taxes, it would go something like this:
• -David R. Kamerschen, Ph.D.
• The first 4 men (the poorest) would pay nothing.
• The 5th would pay $1.00.
• The 6th would pay $3.00.
• The 7th would pay $7.00.
• The 8th would pay $12.00.
• The 9th would pay $18.00.
• The 10th man (the richest) would pay $59.00.
So, that's what they decided to do. The 10 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 $20.00."Drinks for the 10 now cost only $80.00.
The group still wanted to pay their bill the way we pay our taxes, so the first 4 men were unaffected. They would still drink for free.But, what about the other 6 men (the paying customers)?How could they divide the $20.00 windfall so that everyone would get his fair share?They realized that $20.00 divided by 6 is $3.33. But if they subtracted that from everybody's share, then the 5th man and the 6th man would each end up being paid to drink his beer. So, the bar owner suggested... to 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 5th man, like the first 4, now paid nothing (100% savings).
• The 6th now paid $2.00 instead of $3.00 (33% savings).
• The 7th now paid $5.00 instead of $7.00 (28% savings).
• The 8th now paid $9.00 instead of $12.00 (25% savings).
• The 9th now paid $14.00 instead of $18.00 (22% savings).
• The 10th now paid $49.00 instead of $59.00 (16% savings).
Each of the 6 was better off than before. And the first 4 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 $20.00," declared the 6th man. He pointed to the 10th man, "But he got $10.00!"
"Yeah, that's right," exclaimed the 5th man. "I only saved a dollar too. It's unfair that he got 10 times more than I!"
"That's true!!" shouted the 7th man. "Why should he get $10.00 back, when I only got $2.00? The wealthy get all the breaks!"
"Wait a minute," yelled the first 4 men in unison. "We didn't get anything at all. The system exploits the poor!"
The 9 men surrounded the 10th and beat him up.
The next night, the 10th man didn't show up for drinks, so the 9 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 them for even half of the bill! (The 10th man was originally paying $59.00 of $100.00, then $49.00 of $80.00).
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.
• -David R. Kamerschen, Ph.D.
• Professor of Economics, University of Georgia