Tuesday, April 15, 2008

Tax Day Pub 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
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 everyone'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
The eighth now paid $9 instead of $12 (25%
The ninth now paid $14 instead of $18 (22%
The tenth now paid $49 instead of $59 (16%

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

"I only got a dollar out of the $20," declared the
sixth man. He pointed to the tenth man, "but he got

"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 did!"

"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

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
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