I found this in a comment by Fred, on Andrew Coyne’s post, Don’t Tax Property.
Suppose that every day, ten men go out for dinner 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 ate dinner in the restaurant 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 meal by $20.”
Dinner 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 eat 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 eat their meal.
So, the restaurant 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 eat 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 me!”“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 dinner, so the nine sat down and ate 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 eating overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, PhD
Professor of Economics
University of Georgia
UPDATE 12/19/2006: Although the comment claimed that the author is David R. Kamerschen, Ph D., Snopes has been unable to verify the authorship.
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Bar stool economics – with one additional assumption
The discussion below based on the assumption that the budget is balanced, and the 10 men only drink what they can afford collectively as a group. The only question then is how to divide up the bill fairly among the people.
But what if the bar bill costs $120 each week, and the ten men agree they will pay $100 of it now and $20 in the following week.
The bartender says “OK – I’ll give you an IOU” but you’ll have to pay interest on it and that will decrease the amount of beer that you and your friends can buy in the future.
And if you don’t pay the IOU off – and the debt keeps getting larger – then your kids will have to assume the debt and it will be passed from generation to generation where it will impact their life. At some point, your kids won’t be able to buy any beer at all, because they are continuing to pay for the beer that you drank in years before. As well as the interest on the IOU. And at some point, I may just have to cut you all off as a group because you owe me too much.
So now the ninth and tenth richest men at the bar push for paying as little as possible – they want the tax cuts ! – and the benefits of the lower bill will go directly to them. They won’t ever pay the IOU – that is someone else’s problem – and they really don’t care about the next generation and their ability to buy beer.
The truth is – it was all about them. The ninth and tenth richest men were so focused on paying the bartender as little as possible each week, that they didn’t realize that their greediness and short-term thinking would eventually shut down the whole system and close the bar.
In the end, the bartender stopped accepting IOUs form the group and the credit dried up. He started by firing half of his waitresses since there were fewer customers to serve. In the end, he couldn’t pay his bills to the supplier and had to go out of business. And this left the nine and tenth richest men with no friends and no place to go out to each week.
And the ninth and tenth richest men looked at each other and said –
“How could this possibly have happened?”
“Could my selfish tax cuts and foolish spending policies over the past eight years have contributed to this?”
And they sat there as if they didn’t know the answer.
And they STILL asked for more tax cuts, because they couldn’t think of anything that was be beneficial for the group.
So it’s only the 9th and 10th man, the rich in our society, that ran up credit above their head and can’t pay it off? So it’s only the 9th and 10th man that want to pay as little as possible? I think you’ve taken it a little out of context. Actually the problem we’re facing is that the 1st through 4th guys that was drinking for free leveraged themselves to the eyeballs and NOW can’t pay their tab.
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