The Tax System Explained in Beer by Dan Mitchell


Dan Mitchell of the Cato Institute also maintains a blog found here.

I just read one by him explaining the tax system with an analogy of beer drinking.  It was way too good not to share.  It not only covers how the current tax system works, but also the class warfare that erupts when discussing tax cuts.  Really good stuff.  (Dr. Thomas Sowell also discusses the class warfare rhetoric surrounding tax cuts here and here.)

Enjoy!

——————–

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 ball.

“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 men would 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 ? How could they divide the $20 windfall so that everyone would get his fair share?

The bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

  • And so the fifth man, like the first four, now paid nothing (100% saving).
  • The sixth now paid $2 instead of $3 (33% saving).
  • The seventh now paid $5 instead of $7 (28% saving).
  • The eighth now paid $9 instead of $12 (25% saving).
  • The ninth now paid $14 instead of $18 (22% saving).
  • The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 saving,” 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 benefit than me!”

“That’s true!” 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. This new tax 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 their 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 government ministers, is how our tax system works. The people who already pay the highest taxes will naturally 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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5 Responses to The Tax System Explained in Beer by Dan Mitchell

  1. pastorjeffcma says:

    Regardless of how many times I hear it, it never gets old. And this from some one who doesn’t drink at all. By the way, where is my benefit out of all of this? :)

  2. I hear Atlas Shrugged Part II is out and much better than Part I. I intend to see it and find out what really happens when the tenth man doesn’t show up.

  3. Dapper Dan says:

    It did come out this weekend. And I already saw it. :D There were stylistic differences with the first one such as a brand new cast and a more modern feel with less darkness and shadows. Personally, I really liked the cast and style of the first one but this one was really good too.

    As far as content, I thought they stayed really true to the book, just like the first one. The book is essentially a handbook on Objectivism so there are some other things going on besides the economic stuff. The movies tend to cut out the other stuff and focus just on the economic side of things. I like that but there is still too much for the movies to fit in everything.

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