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US Taxes Explained Simply
Old 08-04-2011, 10:53 AM   #1
Professor S
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Default US Taxes Explained Simply

I saw this on-line and had to share it.

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Our Tax System Explained: Bar Stool 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 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, 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
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Last edited by Professor S : 08-04-2011 at 01:54 PM.
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Re: US Taxes Explained Simply
Old 08-04-2011, 05:34 PM   #2
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Default Re: US Taxes Explained Simply

This, at the very least, predates the good day of Digg....so at least pre-circa-08. It's an interesting analogy, but I wonder what someone who knows the ins-and-outs of taxes and economic theory would say?

I wonder if Bond has heard this before.
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Re: US Taxes Explained Simply
Old 08-04-2011, 09:09 PM   #3
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Default Re: US Taxes Explained Simply

Quote:
Originally Posted by KillerGremlin View Post
This, at the very least, predates the good day of Digg....so at least pre-circa-08. It's an interesting analogy, but I wonder what someone who knows the ins-and-outs of taxes and economic theory would say?

I wonder if Bond has heard this before.
Keep in mind, this is just based on rates without loopholes, rideoffs, etc. But the question I ask is: Isn't this the reason why there are so many loopholes?
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Re: US Taxes Explained Simply
Old 08-05-2011, 09:04 PM   #4
Bond
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Default Re: US Taxes Explained Simply

Well, this is true. I think the analogy has a few more key takeaways as well:

- Is there an inherent problem with a tax system in which those who utilize the most government services (the first four men in this analogy), pay nothing in taxes? This seems to be an extreme free rider problem. In contrast, why are we providing / offering the same government services to the poor and the rich (shouldn't some of the core entitlement programs be means tested?)?

- I know I've said this before, but tax rates and tax revenue are not correlated (at the most, they are very loosely correlated). Tax revenue is much more correlated with GDP growth. The single biggest tax revenue year (in terms of total money collected by the government) was the year after the Bush tax cuts. This seems to be counter-intuitive, as tax rates were lowered, but that year also saw a quite significant uptick in GDP growth, hence increased tax revenue.

- In conjunction with the above point, we can see that debates over what tax rates should be for the wealthiest Americans, etc. are political debates, not economic debates. As I've said before, the best way to increase tax revenue would be to adopt a modified flat tax structure, in conjunction with an increase in growth over the anemic pace of the last few years.

- The analogy is easy to tear apart under a strict economic view, as referenced by above. The important thing to remember is that whenever the government intervenes in the free market it necessarily creates inefficiencies. Business is not the government's game. A very reputable argument can be made, though, that the government should intervene in certain areas for social justice reasons, but rarely for economic reasons. The most effective government intervention in the economy comes when it subsidizes a prevailing trend (ex. GI homes post WWII). Notice, though, that this is not the government influencing or controlling a shift in behavior, but rather reinforcing a trend that already existed. So, intervening for social justice reasons often makes sense, but not when it comes at the expense of creating huge unfunded liabilities that threaten to bankrupt the country and stifle economic growth.

Last edited by Bond : 08-05-2011 at 09:16 PM.
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Re: US Taxes Explained Simply
Old 08-07-2011, 08:35 PM   #5
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Default Re: US Taxes Explained Simply

One of the variables that the article fails to address is the type of class warfare inflationary oddities which tie directly into 'quality of life' measures. The beer guzzling free-riders have to contend with a serious shortfall in nutrition. This has been more notably evident since petrol based fertilization has had an increasingly hazardous afffect on those whose economic status keeps them from not only an objective source of health related information, but also an alternative to the predominant supply of nutrient void, carcinogenic foods which have been touted by big business as the answer to world-wide food shortages.
Regardless of what constitutes as fair, motivating forms of free market regulatory policies, these issues are too complicated to resolve through economic theories alone. Until the western market is regulated in a way that protects the ability of its citizens to be able to practice appropriate neural transmissions without hindrence from what is scientifically proven to be cognitive inhibitors, the idea of a democratically reformed market which serves all classes of society in a fair manner, seems a little redundant and more importantly, ignorant of the greater problem which sees revolving door politics take precedence over preventative, altruistic policy making at the local and federal levels of governance.

I really believe that less government is more, but this has been taken to the extreme of creating a slave wages environment that literally forces the least wealthy in our countries to abide with basic food shortfalls that are only an infringement on personal freedoms when examined against the draconian laws, enforced by agencies such as the FDA, to inhibit the poorer populations f rom participating in unobstructed food self-sufficiency practices (I point out seed patents, antiquated bi-laws that restrict 'yard gardens', and the legislation which allows government agencies to inflict bankrupt inducing regulations on small organic farmers who pose little threat to the public in regards to food safety when compared to the de-regulated practices of the largest and most virulently unhealthful sources of food production). What continues to be absent from mainstream news feeds is the abuse that is practiced by agencies at the bequest of big pharma and big agri business interests.

/rant
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