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!'
'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, 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.
For those who understand, no explanation is needed.For those who do not understand, no explanation is possible.
Note: I did not write this. Barstool Economics is a hairy old chestnut that has been floating around the net for years. I swiped it from a posting on a forum for financial professionals. Too good not to pass around.
Brava!
ReplyDeleteVery frigging good DBQ! I will share with others.
ReplyDeleteEgg shell ants!
ReplyDeleteI've read this before and I absolutely LOVE it!
ReplyDeleteSuppose 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:
ReplyDeleteThe 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.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day in 2002, the bar owner, a devout republican, believing in trickle down economics, tried to spur business more by reducing the price of the beers. '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 only problem was that the cost to run the bar remained the same, the bar owner was now in deficit spending.
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 paid $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 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. (Wow! ask yourself if we experienced any riots or a revolution during 2002-2007 when the tax cuts took effect)
The bar owner, did entice some additional business in his bar, but not nearly enough to stop his swimming in debt. So he decided to raise rates on his customers. But how would he do this?? He pondered the question.
He entertained the idea of a flat rate for all of the beers. Everyone could pay $9. This would recover 10% of the lost revenue from the pre 2002 prices and he could more readily operate the bar without the losses. He did after all attract some more business due to the lower rates. He performed some more examination and determined that certainly six of the men would not be able to pay for the beers. The seventh man who was paying $5 might be able to pay nearly double for the beer. The remaining three men would certainly come back since they were paying much less for their beers. But even counting up to four men attending, he would only get $36 at the $9 flat rate. He would have less expenses for the beer consumed, but it still would not make up for his fixed expenses in running the bar.
The bar owner still liked the idea of flat rates, he was after all a devout republican. He cranked the numbers. A $10 beer would not help much, he might be able to increase the revenue to $40, but that last man who was paying nearly double may drop out and his revenue be reduced to $30. What about a $20 beer, now he could only sell to the top two men -- one with a hefty increase from $14 to $20. The flat price for beers would not work in any manner.
So the bar owner went back to the progressive pricing system that had seemed to work well in the past. He decided to keep the prices the same for the lowest paying customers, but to recover his expenses from the highest paying customers, still at a lower rate than the pre 2002 pricing.
The first five men (the poorest) still paid nothing.
The sixth would still pay $2 (33% savings from the pre 2002 prices).
The seventh would still pay $5 (28% savings from the pre 2002 prices).
The eighth would still pay $9 (25% savings from the pre 2002 prices).
The ninth would now pay $16. More than he had but still an 11% savings from 2002.
The tenth man (the richest) would now pay $58, about the same as the original $59, but still lower.
The bar owner was amazed at the amount of complaining from the two richest men. He had heard all of the complaining from the poorer men about unfairness of the system when the prices were reduced. But these complaints paled in comparison to the complaints and threats received from the two richest men. The two richest men complained about the cost increases when in actuality they were still cost decreases from the pre 2002 levels). They complained even louder about their costs in comparison to the poorer men. The bar owner tried to explain that he just could not operate at the lower price levels, but to no avail. The two richest men even threatened to not come back to the bar. You see, they had become accustomed to paying less for their beers and spending money elsewhere.
For a time they even left the bar and went to less expensive bars (some of them even in Bermuda). But they soon realized that the original bar was located in a safe area of town, had good roads to get to the bar, the beer was clear and pure (there were scares of melamine tainting at other bars), the utilities were constantly on and running, and the air was not polluted.
The two rich men came back to the bar for these reasons and decided that you have to actually pay for a quality bar.
And that, boys and girls, journalists and college professors, is how anyone can spin a story rather than discuss the facts about a policy. 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. But then they find out that the other bars are not as good. All bars have their problems but this is still the best one around.