Pages of interest

Wednesday, November 3, 2010

Taxation in Layman's Terms

By: George

I constantly receive emails from friends and "others" with various Political, or Humorous, or perhaps Thought Provoking articles.  With your indulgence, I would like to share some educational scenarios. 

I would like to give credit to David R. Kamerschen, Ph.D., Professor of Economics at the University of Georgia, the author of this analogy.

The Tax System - Explained With Beer
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.
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.

Of course if you still don't understand, I will also include a similar analogy that I have written for my Liberal friend, Harry.  Here it is:

Tax Breaks explained with a mugging.
You and 4 other people are sitting in your doctor’s waiting room for your yearly check-up.  As you are finishing the NY Times crossword puzzle, a thug with a gun bursts in and demands all 5 of you to empty your pockets. 
You have $100; the others have $60, $30, $10 and $0 respectively.  The thug scoops up all the money and escapes, as the receptionist manages to call the police.  The police get right on the case, and 30 minutes later apprehend the Perp.  He admits to the robbery, but he has already spent $100.  The four of you demand to get your money back, but all that’s left is $100.  The police agree to return the recovered money.
The policeman gives the monies to each of you as follows:
You get $50
Second guy gets $30
Third guy gets $15
Fourth guy gets $5
Fifth guy gets nothing.
Question: Is the policeman a - 1) Liberal, 2) Democrat, 3) Conservative.
Answer: Conservative.  
If he would have been a Democrat, each person would have gotten $20 to make everybody even.  
If he would have been a Liberal, you would get nothing (you are rich), the last guy (poor) would get $40, and the other 3 would split the rest and get $20 each.
Now think….  Which policeman would you prefer handling your “refund”?
Believe it or not, my Liberal buddy Harry actually chose the Conservative policeman to handle his refund.  So there is still some hope for him.

That should be enough to think about for today.  Let me know if it was helpful to you.  If you have a better analogy, put it in a comment. If you find any fault in the logic of the stories, by all means show everyone your ignorance. :-)

1 comment:

  1. My thought is if we were allowed to defend ourselves, the gunman might not have known which one of us was carrying a concealed weapon and there might not have been a crime to begin with.
    AND if the punishment of theft carried a sentence of hard labor until the gunman paid these people back, he might have also been deterred from robbery.


Enter your Comment here...