At last, something that should really help you understand how the tax system works

This article was forwarded to me by a friend and client, Gerald Simonds. The original author I gather is a man named  David R. Kamerschen, Ph.D. a Professor of Economics.

I do not know the learned professor. All I would ask is that, if you do, buy him the biggest beer you can possibly afford.

As they say, for those who understand, no explanation is needed. For those  who do not understand, no explanation is possible.

“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? 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 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  pound 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 pound 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.”