A Modern Day Tax Parable

In the wake of our recent election and the looming “fiscal cliff” of 2012, I thought I would post this modern-day parable about our tax system. It’s been posted elsewhere under the title “Bar Stool Economics.” It may not be 100% correct, but it’s close enough to give us something to think about.

Suppose that everyday, ten men go out for beer and the bill for all ten comes to $100.00. They decided to pay their bill the way we pay our taxes, it looked something like this.

The first 4 men, the poorest, would pay nothing.
The 5th would pay $1.00.
The 6th would pay $3.00.
The 7th would pay $7.00.
The 8th would pay $12.00.
The 9th would pay $18.00
And the 10th, the richest, would pay $59.00.

The ten men drank in the bar everyday and seemed quite happy with the arrangement until one day the bar 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 $20.00. Drinks for the ten men would now cost $80.00.

The group still wanted to pay their bill the way we pay our taxes. So the 1st four men were unaffected. They would still drink for free. But what about the other 6 men? How could they divide the $20.00 windfall so that everyone would get his fair share?

They realized that $20.00 divided by 6 is $3.33. But if they subtracted that from everyone’s share, the 5th and 6th 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 a higher percentage the poorer he was. This would 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. So…

The 5th man, like the first 4, now paid nothing (100% savings).
The 6th now paid $2.00 instead of $3.00 (33% savings).
The 7th now paid $5 instead of $7 (28% savings).
The 8th now paid $9 instead of $12 (25% savings).
The 9th now paid $14 instead $18 (22% savings).
The 10th now paid $49 instead of $59 (16% savings).

Each of the six was better off than before and the first 4 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 6th man. He pointed to the 10th man, “but he got $10!”

“Yeah, that’s right,” exclaimed the 5th 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 only got $2? The wealthy get all the breaks!” “Wait a minute,” yelled the first 4 men in unison. “We didn’t get anything at all. This new 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 9 sat down and had their beers without him. When it came time to pay the bill, they discovered they didn’t have enough money between them for even half the beer!

And that, ladies and gentlemen, is how our tax system works. The people who already pay the highest taxes will get the most benefit from a tax reduction. Tax them too much and/or attack them for being wealthy, and they might not show up anymore. In, fact they may start drinking overseas where the atmosphere is somewhat friendlier.

Well, that’s somewhat condemning when put in laymen’s terms. Thoughts?