The U.S. Tax System Explained

The U.S. Tax System Explained

See if this makes any sense to you...

An Example of the U.S. Tax System – Explained In Beer!

How messed up is the U.S. tax system? Maybe this example – using beer to represent tax payments – will illuminate the “injustice”!

The following example of the U.S. tax system was written by David R. Kamerschen, Ph.D., Professor of Economics at the University of Georgia. The original example contained only numbers so I have added my comments…

Suppose that every day after work, ten men go out for beer. For this example, let’s assume that the bar bill for all ten comes totals $100.

If they paid their bill the way we pay our taxes in the U.S. it would be divided like this:

- The first four men (the poorest) would pay nothing. They would drink every day, day after day for free. The cost would be assumed by the rest of the group.
- The fifth man would pay $1.
- The sixth man would pay $3.
- The seventh man would pay $7.
- The eighth man would pay $12.
- The ninth man would pay $18.
- The tenth man (the richest) would pay $59.

Doesn’t seem fair, does it? But that is what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement. But then one day the owner of the bar threw them a curve. He said, “Since your group are such good customers I’m going to reduce the cost of your daily beer by $20. From now on, your group tab will cost just $80.00.”

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, day after day.
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”?

(Note: this example is about a bar tab. When finished, re-read this example and imagine tax cuts – either in the form of increased deductions or newly created "free" benefit programs.)

The paying customers realized that $20 divided by six is $3.33. But if they subtracted $3.33 evenly from the share of the six men, then the fifth man and the sixth man would each actually BE PAID to drink his beer

So, the bar owner suggested that it would be fair to reduce each man’s bill on a “progressive” basis, with the lower income men receiving a greater discount. 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 man now paid $2 instead of $3 (33% savings).
- The seventh man now paid $5 instead of $7 (28% savings).
- The eighth man now paid $9 instead of $12 (25% savings).
- The ninth man now paid $14 instead of $18 (22% savings).
- The tenth man now paid $49 instead of $59 (16% savings).

EACH of the six paying customers was now better off than before. And the first four continued to drink for free. Neither their costs or benefits changed at all.

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! That’s not fair!”

“Yeah, that’s right!” exclaimed the fifth man. “I only saved a dollar, too. Why should he get ten times more than me?”

“You’re right!” 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 man 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, this 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.

* Or, as Ayn Rand writes in Atlas Shrugged, the producers may just retreat from the economy. 

Can the government force employers to hire and/or prevent them from firing? Can the government force (via the tax code) the most productive in society to support and subsidize the unproductive? At a rate all out of proportion to common sense and all the rules of capitalism? Can the government forbid investments outside of the U.S.? Can you find ONE socialistic society that works?

As Margaret Thatcher is quoted, “The problem with socialism is that eventually you run out of other peoples’ money.”

You better check your facts when you claim “the wealthy” need to “pay their fair share”!