The Blog of Kendall

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January 15, 2008

Beer and Taxes… it got my attention

Written by
Kendall Schoenrock

Ten men go out for beer. 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. He said, “Since you are all such good customers, 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!”

“That’s true!!”shouted the seventh man. “Why should he get $10 back when I got only $2 ? 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 any more. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D. Professor of Economics, University of Georgia

One comment for this post.

  1. Comment from Christopher Bennett on January 19th, 2008 :

    Kendall, (sorry if this is long winded..no one visits my blog so live precariously through yours..lol)

    Excellent example. What sounds like a joke to begin turns out to be nothing funny at all. Even as simply put people still, will not get it and continue to bash. I am no where near wealthy yet, (well, at least not monetarily) but have no fear I continue to reach for the sky.
    Recently, just about every time we have spoken on the phone, we somehow end up talking about India and outsourcing work there. We really need to face it, we (America) are our own worst enemy. Many of our problems and wounds are self-inflicted. The way I see it is; You want to keep your money right? Then here is my take. Gene walks into store A to buy a product and while in line to purchase said product. Gene over hears that store B has the same product for %50 percent less. Gene abandons the product on the nearest shelf and heads over. After saving umpteen amounts of money at store B. Gene now realize’s she can purchase those much needed snow tires for her car, but passes on the idea putting the money in her pocket. Meanwhile on Gene’s way home she is on her cell phone complaining about wage cuts and layoffs how bad things have been since the company move manufacturing down to Mexico 3yrs ago. In the midst of Gene’s ranting, she is late to react to a red light and without the new tires she slides through it. Gene is broadsided by another vehicle. Gene is alive because the car company she worked for that moved it’s manufacturing into Mexico was able to put 4 million back into safety development. Thus putting more safety features such as ” Side impact airbags”, “Crumple zones” and even “On Star” in vehicles that other wise would only be available to guess who? Yep! the wealthy. It really goes to show there is more to money than what gets put in your pocket. I like to put things on a grander scale than just some miser on a throne overseas collecting his gold. Just a perspective..

    Christopher

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