How Taxes Work — or, ‘How to Pay for Beer’
By Jason Kenney | Thursday, October 23rd, 2008 | PolicyBy David R. Kamerschen, Ph.D. Professor of Economics, University of Georgia, found on BuzzFeed
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. Then he pointed at 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, 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.
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About the author
Jason Kenney has blogged at J’s Notes since 2001, is the director of RedStormPAC providing online fundraising for Republican candidates in Virginia, and co-founder of K6 Consulting. He is a graduate from Virginia Commonwealth University and resides in Richmond, Virginia.
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14 Responses to "How Taxes Work — or, ‘How to Pay for Beer’"
To be accurate, shouldn’t all 10 being paying aaround $50 total while charging the rest to the Bank of China/ their kids?
Of course, don’t worry said the Republican, we don’t need to pay taxes, it’s unpatriotic to pay taxes, we can just leave the bill for our kids!
Mark, you’re a ding-a-ling. If this was a story about how Washington worked, then they would drink way too much and leave the bar-owner with the bill.
You must be another Republican who thinks we get government services for free. Grow up.
What is the proximate cause of the collapse of confidence in the world’s
banks? Millions of improvident loans to American house buyers. Which
organizations were on their own responsible for guaranteeing half of
this $12 trillion market? Freddie Mac and Fannie Mae, the so-called
Government Sponsored Enterprises which last month were formally
nationalized to prevent their immediate and catastrophic collapse. Now,
who do you think were among the leading figures blocking all the earlier
attempts by President Bush – and other Republicans – to bring these
lending behemoths under greater regulatory control? Step forward, Barney
Frank and Chris Dodd.
In September 2003 the Bush administration launched a measure to bring
Fannie Mae and Freddie Mac under stricter regulatory control, after a
report by outside investigators established that they were not
adequately hedging against risks and that Fannie Mae in particular had
scandalously mis-stated its accounts. In 2006, it was revealed that
Fannie Mae had overstated its earnings – to which its senior
executives’ bonuses were linked – by a stunning $9.3billion. Between
1998 and 2003, Fannie Mae’s executive chairman, Franklin Raines, picked
up over $90m in bonuses and stock options.
Yet Barney Frank and his chums blocked all Bush’s attempts to put a
rein on Raines. During the House Financial Services Committee hearing
following Bush’s initiative, Frank declared: “The more people exaggerate
a threat of safety and soundness [at Freddie Mac and Fannie Mae], the
more people conjure up the possibility of serious financial losses to
the Treasury which I do not see. I think we see entities that are
fundamentally sound financially.” His colleague on the committee, the
California Democrat Maxine Walters, said: “There were nearly a dozen
hearings where we were trying to fix something that wasn’t broke. Mr
Chairman, we do not have a crisis at Freddie Mac and particularly at
Fannie Mae under the outstanding leadership of Mr Franklin Raines.”
When Mr Raines himself was challenged by the Republican Christopher
Shays, to the effect that his ratio of capital to assets (that is,
mortgages) of 3 per cent was dangerously low, the Fannie Mae boss
retorted that “our assets are so riskless, we could have a capital ratio
of under 2 per cent”.
Maxine Walters’ complaint about previous attempts to bring the great
state-sponsored housing finance bodies under stricter control was partly
a reference to Bill Clinton’s efforts. Last week the former President
acknowledged that “responsibility” for the absence of proper regulation
rested “with Democrats who were resisting any efforts of Republicans in
Congress, and earlier when I was President and tried to impose tighter
standards on Fannie Mae and Freddie Mac”. Then, as now, members of his
own party saw all such initiatives as unwonted attacks on the chances
for low-earners, and particularly African-Americans, to own their own
homes.
From its inception in 1938 Fannie Mae (and later Freddie Mac) was
designed to make housing finance available to “ordinary Americans”. This
was a noble aim. In the 1970s another Democrat President, Jimmy Carter,
introduced legislation which demanded that such bodies enhance their
lending to minorities. Again, this was based on a noble idea: to stamp
out racism in the mortgage market. Thus by 1998 you had the Federal
Reserve Bank of Boston producing a document entitled “Closing the Gap: a
Guide to Equal Opportunities Lending”, which instructed banks that an
applicant’s “lack of credit history should not be seen as a negative
factor” in obtaining a mortgage. As Stephen Malanga of the Manhattan
*Institute notes: “Of course the new federal standards couldn’t just
apply to minorities. If they could pay back loans under these terms,
then so could the majority of loan applicants. Quickly, these became the
new standards in the industry. As the housing market boomed, banks
embraced these new standards with a vengeance. Between 2004 and 2007,
Fannie Mae and Freddie Mac became the biggest purchasers of subprime
mortgages from all kinds of applicants, white and minority, and most of
these loans were based on lending standards promoted by the Government.”
One of the few journalists to see where this would lead was Jeff
Jacoby, of the Boston Globe. Last week he reminded his readers what he
had written in 1995: “Our banks are knowingly approving risky loans to
get the feds and the activists off their backs… When the coming wave
of foreclosures rolls through the inner city, which of today’s
self-congratulating bankers, politicians and regulators plans to take
the credit?”. Jacoby adds now: “Barney Frank doesn’t. But his
fingerprints are all over this fiasco.”
It’s true that the improvident lending was not initiated by Fannie and
Freddie: their role in this was to buy these loans and sell them on –
but then the music stopped. Cynical students of the American political
system will note that the biggest recipient of campaign contributions
from the munificent duo of Fannie and Freddie over the past 20 years was
one Christopher Dodd, Democrat Chairman of the Senate’s Banking
Committee.
Rather surprisingly, given that he has only been in the Senate for four
of those years, the second biggest beneficiary was Barack Obama. In
August the Washington Post reported that Obama’s presidential campaign
team had sought the advice of Franklin Raines “on mortgage and housing
policy matters”. Perhaps Mr Obama’s team just wanted to know where all
the bodies are buried – there are rather a lot of them.
The saddest outcome of all this within America – apart from the
crippling cost to the nation’s taxpayers – is that the very people the
Democrats had intended to help will be the biggest victims: for many
years to come banks will demand the most stringent terms for mortgages
to the least well off.
In the meantime, let us praise Congressman Artur Davis of Alabama, who
confessed this week: “Like a lot of my Democrat colleagues I was too
slow to appreciate the recklessness of Fannie and Freddie when in
retrospect I should have heeded the concerns raised. I wish my Democrat
colleagues would admit that we were wrong.” I fear Congressman Davis
will not go far with this attitude – but at least he will be able to
look at himself in the mirror.
Excerpt from what Donald Lawson wrote at the UK Independent
Jason Kinney,
I am sure you liked the example given by the right wing leaning professor.
Now I will first explain I am unashamedly in favor of a progressive tax code.
I wonder if the professor’s example would explain how Thelma Drake wants to increase my taxes by more then $5,000 (less money for beer) in order to give a tax cut to Paris Hilton who has plenty of money for beer? If Thelma Drake gets her way I might have to give up drinking beer because I can no longer afford it. Meanwhile Paris Hilton has proven she can’t handle the amount she already drinks.
Teddy Roosevelt was also unashamedly in favor of a progressive tax code – heck, so was John McCain ver 1.0. It’s only been the last year tht McCain’s straight talk express fell off a cliff to the right
Mark,
I was willing to give John McCain the reason of the doubt up till he picked Sarah Palin for VP. That’s when the Straight Talk Express fell off its tracks for me.
Congrats Jason, you’ve just earned your Objectivism merit badge. Ayn would be be so proud.
I see a missing peice though. For the last 8 years, the wealthiest guy has been paying less than he was before, saying that if he pays less, in the long run, the others will too. Unfortunately, the barkeeper was just running up the tab on what the wealthy guy wasn’t paying, and now they all need to cover it.
Don’t worry. If Obama wins, it won’t take two years before everyone in the bar is ready to beat up Obama for lying about free beer when and they’re all paying more for it.
A poor man never created a job for anyone except government.
Jeremy, at some point the bar needs to cut them off or people need to stop going to the bar.
Stil, for the last 8 years EVERYONE has been paying less. But now the guy at the end of the bar who’s been whispering to the other nine while richy is in the bathroom about how they’re getting ripped off is hoping they’ll buy it so he can get free beer too.
I can’t wait until the election is over so Mark and the Democrats can stop being smarmy, angry people. Of course I said that in 2004 and 2006 and they never did stop… but a boy can dream
That is why I cannot be a Democrat… well there are a lot of reasons, but mainly because I could not live my life angry, blaming others and being a self “enlightened” martyr all of the time.
It must be such a burden to be a liberal.. I mean be SO much smarter than everyone else and be so much more enlightened that everyone. Oh the burden.
Ech.
Jason, i think we both can agree the that this analogy is about played out (translation: I’m having trouble finding some insightful and yet snarky comment to fit it at this point). I do agree about the tab though, we’d be in better shape if the bar (and the patrons) had payed more attention to it.
SW, it is pretty hard being so phenomenally enlightened, but it’s a burden I and my fellow liberals have resigned ourselves to bear. Do feel free to come visit me at the foot of the banyan tree though, grasshopper, and share in the cosmic wisdom that is liberalism.
Brian – what a typical elitist GOP thing to write. I guess only the rich – from “real America” – have contributed anything to our economy.
SW – you obviously spend too much time listening to Rush/ Hannity/ Faux News as you know nothing outside their party-line pravda propaganda.
If you want to see real hatred and anger read some of the comments on FauxNews.com, seriously y’all on the right have gone a little nutty over the idea of losing control of the Executive.
Jason Kinney,
Yeah, and for the last 8 years everyone has been assuming an increasing amount of the national debt.
Seems to me you are selling debt is good, which is part of the current economic problem.
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