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Taxes and beer

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My Dad sent this along to me.  I don’t know if he wrote it or if he read it someplace else.  It is not really philosophical, though there are basic questions about fairness embedded here.  It is also rather funny.

A brilliant explanation of our tax system, the impact of a tax cut, and the public reaction  –
 
Every day 10 men go out for a beer and the bill for all ten comes to $100.  If they paid their bill the way we pay our taxes, it would look something like this:
    The first 4 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 (richest) would pay $59
 
So that is 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 taxes, so the first four men were unaffected.  But what about the other six men – the paying customers?  How could they divide the $20 windfall so that everyone would pay their “fair share?” 
 
They realized that $20 divided by 6 was $3.33.  But if they subtracted that from everyone’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 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 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 $1 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 back $10 when I only got $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 did not show up for drinks, so  the nine sat down and had beer without him.  But when it came time to pay the bill, they discovered something important.  They didn’t have enough money among all of them for even half of the bill! 
 
And that my children is how our tax code works.  The people who pay the highest taxes get the most dollar 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 or in Mexico where the atmosphere is somewhat friendlier. 
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16 Comments

  1. Mike says:

    Sounds somewhat like the preface to every Ayn Rand book.

    Like

  2. Kleiner says:

    A disclaimer: the ‘argument’ presented in the beer story is not mine, but I will try to defend it here.

    Mike is right, Ayn Rand is apt to say such things. But I don’t think we need identify the view here with Rand. For instance, one could hold the above view and not be an egoist, not be a radical individualist, accept altruism, etc etc. In fact, I know my Dad is not a Randian, he is no egoist, and is actually quite altruistic.
    I don’t think Rand is a very serious thinker, but I do think the view of justice expressed in the above story deserves to be taken seriously. Mike did not mean this, but I would hate for the point of view to be dismissed for ad hominem reasons (Rand would say something like this, she is wrong and silly, so the view must be wrong an silly).

    Like

  3. Mike says:

    I didn’t mean to disparage the argument by attaching it to Rand. I meant to disparage Rand by attaching her to the argument.

    I’d take the “argument” seriously if it had an adequate story about the origin of the wealth and the supernatural capacities of the rich man to create wealth in a vacuum. We should create a good environment for wealth creation and those on top of it but that sort of environment doesn’t come into place magically.

    “The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion. ” -Adam Smith (Wealth of Nations)

    I don’t see how we can get away from a progressive tax system.

    All that being said I would prefer a flat tax or something that gets rid of a lot of the unnecessary stuff that keeps a lot of lawyers and a bloated IRS in business. There has to be a way to cut it down so that it doesn’t encumber all of us with a lot of paperwork and legal fees.

    In the end, I try not to hang out with unreasonable, rude and unappreciative drunks (i prefer happy drunks). The most damning thing about these guys is that they can’t hold their alcohol.

    Trickle down economics works about as well as trickle down philosonomics, if you hope and pray hard enough, it might trickle down. The thing about poor people is that they have no choice but to contribute to the economy (they gotta live). Rich people always have the option to spend or not spend which is why the hope and prayer is so necessary for trickle down econ to work. (and yes, i know money is at work when it’s in the bank, a fact that seems rather unfortunate recently).

    In any case we’re trying to create the best ecosystem here for everyone involved. The free market is a great tool but not perfect on its own and government is a necessary balancing device. Everything else is a matter of degree. I prefer a smaller federal government that pushes a lot down to local government but as far as i can tell, no party believes in that any more. The repubs and dems want massive gov and the libertarians aren’t reasonable at all — they buy these sorts of arguments wholesale.

    Not exactly related but– why can’t we let a few businesses fail in America? Are we really going to keep bailing everyone out? I know we want to keep the economy going well but this really doesn’t seem like optimizing for the best sorts of capitalism. If the bigger auto makers are replaced with a bunch of small eco friendly auto companies that makes for a great environment for competition. The government should offset monopolies when they crop up, not create them. Put all that money into grants and prizes entrepreneurs can compete for.

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  4. Huenemann says:

    I don’t know a lot about this. But I hear repeatedly that several extremely wealthy corporations — not individuals — often pay no taxes or even receive government funding, under the banner of “encouraging economic growth.” And my bet is that the higher-ups in such companies receive large enough bonuses, even when they drive their corporations into the ground, to more than compensate for any taxes they pay.

    To adjust the beer scenario, maybe we should envision the 9th and 10th men as actually owning the bar, and so raking in the others’ money, and then paying a little of it back. Sweet deal.

    Like

  5. Anonymous says:

    Table 1: Distribution of net worth and financial wealth in the United States, 1983-2001
    Total Net Worth
    Top 1 percent Next 19 percent Bottom 80 percent
    1983 33.8% 47.5% 18.7%
    1989 37.4% 46.2% 16.4%
    1992 37.2% 46.6% 16.3%
    1995 38.5% 45.4% 16.1%
    1998 38.1% 45.3% 16.6%
    2001 33.4% 51.0% 15.5%

    Financial Wealth
    Top 1 percent Next 19 percent Bottom 80 percent
    1983 42.9% 48.4% 8.7%
    1989 46.9% 46.5% 6.6%
    1992 45.6% 46.7% 7.7%
    1995 47.2% 45.9% 7.0%
    1998 47.3% 43.6% 9.1%
    2001 39.7% 51.5% 8.8%

    Like

  6. Kleiner says:

    Interesting ideas Vince. Though the death tax does raise ‘double-taxation’ issues, inheritance does seem to be in some ways ‘anti-American’. I don’t think the claims about any injustice in the beer example necessarily mean a flat tax is the best idea. One could still have a progressive tax, just not an excessive one. For my part, I would rather incentivize charitable giving rather than have the money go to what is, by almost every account, a very inefficient government.

    Anonymous’ post on income distribution is probably about right. But one could point to statistics that suggest that, commensurate with their high % of wealth, the wealthiest already pay a high % of the overall tax. The top 5% of income earners pay almost 43% of the overall government revenue. The top 20% contribute about 69% of the govt revenue. So their contribution to the government coffers is actually pretty close to their ownership % of net wealth. The bottom 80% of income earners only contribute about 30% of the govt’s revenue, the bottom 50% contributing only about 7%.

    There are, as always in such discussions, two values: liberty and equality. Libertarians tend to focus on liberty and see all non-voluntary taxation as theft. Socialists focus on equality and so push for public ownership of means of production. Most Americans think both values are real values, and so need to strike a balance. For that reason, one need not take from the beer example an argument for a flat tax. Equality is a value and the wealthiest Americans ought to contribute more. But how much should they contribute? Is 70% of the government revenue not enough? Should they pay 90%? 100%? At what point does the demand for equality unfairly infringe on their liberty?
    There is a balance to be struck. The populist rhetoric – on both sides of the aisle this last campaign – has a tendency to oversimplify the matter.

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  7. Mike says:

    Just for clarity when I’m talking about a flat tax I’m really just saying something that simplifies the tax code (flat tax as a clear, unarguable percentage). I’m under no illusion that it could be something other than a progressive tax. A complex tax code also favors the rich (the ones who can afford the lawyers).

    I try not to think about politics in terms of “sides of the isle”. There’s plenty of failure to go around.

    Like

  8. Jordan says:

    I like it when we mix philosophy/politics and beer. It should be done, oh, a lot more. With real beer.

    Like

  9. Anonymous says:

    I have no problem with double taxation and the inheritance tax, if they help us have a more equitable society. Calling them unAmerican is just a verbal slam to inhibit the examination of options to improve our society. There is nothing really immoral about a billionaire suffering double taxation. Though there is something immoral about billionaires paying a 15% tax rate on their billion dollar income (hedge fund managers). These heros of American Capitalism now have no other obligations to their fellow human beings. That is indeed immoral.

    Also I think the ‘inefficient government’ mantra is an overused phrase. It is time to bury it to allow a more thoughtful discussion of the proper place for government and private efforts. As far as I can tell the inefficiencies of unregulated greed in public companies is rather overwhelming the world right now.

    My mother worked about 60 hours a week for 30 years as a poorly paid Utah social worker to find suitable help for severely handicapped human beings. Her job in a private company would have paid her more and required a 20% profit for investors and highly paid executives. Also, for-profit companies operating a care facility for the handicap would be a conflict of interest. Cutting care to enhance profit would eventually dehumanize those they serve. Government is the best avenue to serve in some situations where competitive market is difficult to establish or the profit motive conflicts with an altruistic service.

    The discussion should not be ‘government inefficient’ – ‘private companies efficient’ any more. The discussion needs to be a bit more thoughful.

    Like

  10. Kleiner says:

    I am actually pretty non-partisan about these things, though Anonymous may not believe that. Regarding govt inefficiency, I don’t think that is just a ‘mantra’, as best as I can tell it is simply an empirical fact. Not for profits are almost invariably faster to the crisis and more efficient in distributing goods and services. If we let companies fail (as Mike suggested above), inefficiency is not rewarded in the marketplace (the libertarian in me really came out with this bank bailout, why not let them fail and let the market sort itself out?). That said, I’m not suggesting the govt does not have a role (including in public education, primary care, etc etc). School vouchers, for example, are a really lousy idea since they presume that all students cost the same amount. They don’t, and private schools can turn away special needs children while public schools cannot. I think we all have a civic obligation to help pay for the education of all American children, and the govt seems like the least bad vehicle for this.
    I called double-taxation ‘un-American’ since the conflict between the American colonies and Britain was started, in part, because of a revolt against the double taxation imposed on the colonies. Our taxation is not just double either. It is taxed as income, once invested its dividends are taxed. When sold its capital gains are taxed. And when you die it gets taxed again.
    Again, I think the oversimplification is that the ‘rich’ are just these ‘billionaire hedge fund managers’. Of course there are some of those, but the vast majority of people that make $250,000 or more (Obama’s definition of rich) are not greedy billionaire ceos, they are doctors, lawyers, double-income professional families, and small business owners. Their lives are much more like yours or mine than they are like the proverbial billionaire ‘rich evil hedge fund manager’. This populist Obama mantra that we will solve all the world’s problems if we just make the rich pay their ‘fair share’ is just demagoguery. (Again, what is their ‘fair share’? – they already pay 70% of govt revenue, roughly in accordance with their share of net worth. Equality is a value, Anonymous, but do we pursue it at the absolute expense of liberty?). For my part, I’m more interested in encouraging a ‘culture of charity’ than I am in big government programs.

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  11. Kleiner says:

    Regarding demagoguery: Plato, Republic Book VIII (~555). Socrates is convinced that tyranny arises out of demagoguery, when the people become convinced that the wealthy are plotting against them. Because of this manufactured fear, they elect a ‘special leader’ – someone who will change things and make things right (he makes lots and lots of promises). Anyone who dares question the special leader is immediately cast as an ‘enemy of the people’. And the seeds of tyranny are sown …

    Soc: The people are a third class, consisting of those who work with their own hands; they are not politicians, and have not much to live upon. This, when assembled, is the largest and most powerful class in a democracy.

    Adeim: True, he said; but then the multitude is seldom willing to congregate unless they get a little honey.

    Soc: And do they not share? I said. Do not their leaders deprive the rich of their estates and distribute them among the people; at the same time taking care to reserve the larger part for themselves?

    Adeim: Why, yes, he said, to that extent the people do share.

    Soc: And the persons whose property is taken from them are compelled to defend themselves before the people as they best can?

    Adeim: What else can they do?

    Soc: And then, although they may have no desire of change, the others charge them with plotting against the people and being friends of oligarchy?
    Adeim : True.

    Soc: And the end is that when they see the people, not of their own accord, but through ignorance, and because they are deceived by informers, seeking to do them wrong, then at last they are forced to become oligarchs in reality; they do not wish to be, but the sting of the drones torments them and breeds revolution in them.

    Adeim : That is exactly the truth.

    Soc: Then come impeachments and judgments and trials of one another.
    Adeim : True.

    Soc: The people have always some champion whom they set over them and nurse into greatness.

    Adeim: Yes, that is their way.

    Soc: This and no other is the root from which a tyrant springs; when he first appears above ground he is a protector.

    Like

  12. Mike says:

    I have a hard time stomaching criticism of Obama and supposed defenses of “liberty” when it’s fairly easy to see how liberty and the rule of law were nearly annihilated under Bush. Obama winning is finally a good sign that more people are paying attention. It remains to be seen if he will misuse the power Bush created for him. I remain hopeful that he won’t but I’ll bash him constantly for every bad choice he makes. FISA was the first really bad choice he (Obama) made.

    As far as I can tell, “the right” (excluding their intellectuals who have been banished — George Will, Colin Powell to name a couple) lives in some parallel universe where torture, warrantless wiretapping (spying on your own people, and in the case of FISA, paying companies who are supposed to be providing you with a service to spy on you for the govt), unchecked executive power, optional wars and such are just trivial matters. To me, the economic problems are trivial by comparison.

    There’s no doomsday coming, doomsday is here. Hopefully it’s on its way out. I remain optimistic but given past experience it may not be long before that optimism is shattered.

    Those who claim to care about liberty should have been fighting for it in 2004. The past is the past, it’s a time to move forward but we can’t just ignore that stuff and start focusing on the economy. Those problems need to be fixed, people need to be held accountable and the rule of law needs to be restored. Any other step is a move in the wrong direction.

    “Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.” – Benjamin Franklin

    In a number of cases, Obama’s tax rates are lower than Reagan’s.* I’m not sure why this is even an issue.

    I’m a fiscal conservative in a lot of ways but if I have to choose between “socialism” and poorly thought out cronyism I’ll chose “socialism” every time. It’s also nice that we’ll once again have a president with the capacity for complex thought. I’m still watching the clock tick tick tick until inauguration day.

    The legacy of Bush — turning fiscal conservatives into committed liberals.

    Like

  13. Kleiner says:

    In raising concerns about an Obama administration, am I immediately thereby made a defender of the Bush administration? You’ll get no argument from me about the gross perversion of govt power under the Bush administration (the morally reprehensible assault on human rights at ‘Gitmo’ comes immediately to mind).
    I’m just pointing out the dangerous demagoguery, and trying to bring some sense to a world that seems to have gone mad over the promise of a politician (a savvy politician, but a politician all the same). Forgive me for being cynical in a time of alleged ‘renewal’, but I just don’t think Obama (or anyone other politician, for that matter) is the agent of renewal and rebirth, even if we have annointed Obama as ‘the one’ (to use Oprah’s words).
    I am not big for radical change and ‘remaking the world’ in a new image. I suppose I am conservative in that sense – I have great trust in the deposit of cultural wisdom that is the inheritance of western civilization. I tend to want change to be slow, and sometimes wonder if we make the right choice when we opt for ‘progress’ over ‘return’.

    Like

  14. Mike says:

    I agree with you that’s it’s dangerous to put so much weight into a promise but it’s better than the available alternatives. Glad you’re not defending the Bush administration.

    I’m just trying to point out that those issues aren’t resolved yet. Just because the media moved to the economic issues doesn’t mean we have to go there as well.

    “Return” in some ways would be a better rallying cry but it doesn’t combine with it a clear awareness of where we’re at in the historical moment. Also, the catastrophic change you’re worried about is upon us and has already come to pass. Changing back is a big movement at this point, unfortunately. Obama seems pretty even keeled though. I’m not sure why there’s so much fear about him.

    A lot of people in the last eight years were calm when they should have been afraid and afraid when they should have been calm. They are who I fear and why I fear for the nation.

    Like

  15. Kleiner says:

    Let’s not confuse an evil-keeled persona with moderate policy views. He is even-keeled as far as his personality goes, but he is no centrist Democrat.

    Here is one possible fear:
    Obama stays true to his word, and the first bill he signs as President is FOCA. This clears the way for government funding of abortion, and mandated abortion at any hospital that gets federal dollars (FOCA would spell the end of the ‘conscience clause’ exemptions). Some Catholic Bishops, at the recent USCCB meeting, suggested that they would shut their hospitals down rather than being forced into participating in a ‘grave evil’.

    Like

  16. Kleiner says:

    Well, I don’t think I am a conservative reactionary, nor do I think I am a thoughtful Thomist. Either way, I’ve taken no offense. I’m actually politically pretty confused. One day I want socialism, the next a libertarian dream, the next a theocracy. Politics should be difficult for Christians because the city of man is not the city of God. About the only thing I am pretty sure of is that modern political liberalism (Locke, etc) has an insufficient understanding of freedom (because it is not ordered freedom, and their view of man has been stripped of any natural telic good). Anyway, like everyone else I will wait and see what Obama does. I appreciate the historic nature of his election, but am very leery of some of his apparent intentions. I will be surprised if he governs from the center as he has not acted like a centrist in his short time in the Senate. I take the claims that he is ‘post-partisan’ to be complete bull. But we’ll see …
    The Church cannot moderate her position on abortion (any more than one could moderate a position against mass murder, genocide, rape, or any other intrinsically evil act). But I don’t think the pro-life movement has been well directed. We should spend less time trying to change Roe and more time trying to change hearts and minds. Our legislative goals should be much narrower (preserving some regulations, which with the Obama administration will mean fighting against FOCA, etc). But we should make the legality of abortion pointless by helping to create a culture of life.

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