Sorry for the lack of a Monday blog post, but I’ve been sick for 24 hours with what I think was a bad turkey sub from Subway.
Rather than leave the blog empty, please enjoy this fantastic explanation of our taxation system by an economics professor who also likes beer…
THE TAX SYSTEM EXPLAINED IN BEER
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.
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!
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.
David R. Kamerschen, Ph.D.
Professor of Economics.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible
________________________________________________________________________________________________________________
We’re in week three of this “Occupy Toronto” protest, and I can still see the tents from my balcony.
As a Toronto tax-payer, I’m wondering why the police aren’t removing these people. They’re illegally camping in a public park without a permit. Now if I were to go set up a tent in the middle of Trinity Bellwoods Park, how quickly would I be removed?
Are our city’s leaders afraid to deal with people they way they should be dealt with?
Is it simply ‘somebody else’s’ job?
I think if we went down to the park with thousands of job applications and pens, that would send the protesters running.
Or, perhaps they could just have the taxation system explained in beer (likely Pabst Blue Ribbon or whatever is on sale), and maybe, just maybe, they would understand. Or not…
Dave
at 2:17 pm
David, I enjoy your blog, and appreciate your effort to post something entertaining for us while you recover.
However in this case, the article in question is unfortunately a bit of a sham. It has been circulating around for the last 10 years and it was not written by the professor quoted as its author.
I quote from the following link
http://davidk.myweb.uga.edu/
“Contrary to Internet folklore, Dr. Kamerschen is NOT the author of “Tax Cuts: A Simple Lesson in Economics” or “Bar Stool Economics” or anything similar to that. Additionally, he does NOT know who wrote it and he has no opinion on its merits.”
Notwithstanding the issues around its authorship, the logic the story uses is flawed, and it furthermore applies that logic to a strawman circumstance which does not acurately describe what has happened with tax cuts in recent years, nor with the current state of the tax system in the US in particular.
For the consideration of the reader, I refer you to the following two charts and ask you to consider the similarity between the decades of the 1920’s and 2000’s.
http://en.wikipedia.org/wiki/File:Chart_of_US_Top_1%25_Income_Share_(1913-2008).svg
http://en.wikipedia.org/wiki/File:Chart_1.png
Finally, in the interests of disclosre, I’m an actuary and insurance executive. Personally, I’m all in favour of paying less tax, but I think there are storm’s a brewing and higher tax on the wealthy and high income are inevitable and necessary. My 2 cents
David Fleming
at 2:37 pm
@ Dave
Yeah, I was being a bit facetious when I said “It was written by an economics prof. A quick Google search of any of these circulating emails reveals the true origins.
Like you said – I’m just looking for something to post today.
I also agree about higher taxation of the rich, however I think that the protesters (or anybody for that matter) fail to distinguish between taxation of the rich in Canada versus the United States. When Warren Buffet came out and said that there’s something wrong with a system that allows his secretary to pay more in taxes than he does, I though it was a turning point for the United States. Maybe I’m watching too much Jon Stewart and Bill Maher, but I can’t help but notice how little the super-rich pay in taxes in the US. It’s simply not the same in Canada, and protesters around the world aren’t distinguishing between the system they live in, and the system that started the Occupy Wall Street movement.
Dave
at 3:14 pm
Agreed, income tax in Canada is not as inequitable as in the US.
The leading indicator for income equity is the Gini coefficient. See the link below, where Canada is at 32%, vs the US at 40%, and the most equitable countries like Denmark and Sweden at 25%, and Mexico et at at 52%.
http://www.visionofhumanity.org/gpi-data/#/2011/gini/
Tammy
at 2:20 pm
I think you should take a sharpie, write this on a sign and go visit the lunatic fringe we have been staring at for the past two weeks. Make sure you capture their blank looks on film 🙂
Oliver
at 3:33 pm
I agree with you, David, that the youth in the U.S. are protesting a very different (current) reality from those here in Canada.
I ask, however, as we see the Canadian government continuing to allow citizens to purchase houses with 5% down, allowing Canadians to take on mortgages they can’t afford in spite of historically low savings rates (even allowing them to TAKE OUT THEIR RETIREMENT SAVINGS TO FUND AN “INVESTMENT”), the failing of the Bank of Canada to curb inflation, and the permissive attitude of the Conservative Government that allows banks and mortgage brokers to finance huge risk on the taxpayer’s dollar through the wonderful (Crown Corporation) CMHC… are we really that different from our neighbours to the south after all?
What incentive is there to buffer risk on the part of the banks when they know they know the government will pay out their bad investments?
We’ve given them carte blanche to be reckless in making money off the misinformed masses; they’ve been provided a bailout before a bailout should be needed.
Yes we cut from 40 to 35 amortizations… Applause all around. The fact remains we continue to let 20-something’s making 50k/year put 10k down on a $310,000 piece of crap in the sky, without blinking.
This WILL end in tears. It happened across Europe, in Spain, and in the United States. Our government, like that of China, would prefer to pretend that everything is still going swimmingly.
As the Boomers turn the page to retirement, with no savings and a future tied heavily to the “equity” in their homes… we will see the error of our ways.
And the 10th man will see everyone clammering for a piece of this pie. “The government bailed out the banks, why is it not bailing out Canadians?” the poorer will cry.
And the 10th man will walk away from the table.
The youth have every right to revolt. They are, after all, the ones who will feast on the scraps of a economic meltdown.
Kyle
at 9:39 pm
You really shouldn’t drink and post.
David Fleming
at 11:42 pm
@ Oliver
I somewhat agree with “The youth have every right to revolt. They area, after all, the ones who will feast on the scraps of an economic meltdown.”
However, I only agree in theory.
Because I think the youth of today are lazy, unmotivated, unbelievably entitled, and they don’t want to work for it.
I’m not just talking about those spoiled, rich kids whose parents have money and who don’t want do anything short of taking over their parents’ business as a de-facto VP and not doing any work.
I’m talking about any and all of the young demographic. Just look at the entitlement in the public education system as an example. Kids today feel as though they should automatically pass just for showing up to class. There’s no failing anymore; no late marks, no penalties for cheating. Then they get out into the real world, and they think it’s unfair.
What’s the average age of the protesters in the park? I bet it’s mid-20’s. No coincidence there…
Oliver
at 8:51 am
@ David
“Kids today feel as though they should automatically pass just for showing up to class. There’s no failing anymore; no late marks, no penalties for cheating. Then they get out into the real world, and they think it’s unfair.”
And yet boomers decry their inability to live a comfortable retirement due to their own mismanagement of money and lack of savings, all the while expecting fully funded healthcare, prescription drugs and long-term care facilities when they can no longer take care of themselves… and best keep taxes low!e
Once you retire you should be able to use what little money you saved to go to Florida every year, not co-pay for QUALITY long-term care, dammit! You worked for years! You paid taxes!
There’s no failing anymore.
Watch an episode of Till Debt Do Us Part, or tune into that obnoxious Suzi Orman Show, and you’ll see “lazy, unmotivated (and) unbelievably entitled” are adjectives not only applicable to our youth.
Entitlement is an inherited illness.
Oliver
at 8:29 am
I’m dyslexic.
Not drunk.
Back on your high horse, please.
Kyle
at 1:57 pm
My apologies. The ease with which, you present anecdotes and notions pulled out of your bum, as facts; made me sure you were drunk. Well, that and the last four paragraphs, which i attributed to rye rage. Again i apologize. it was presumptuous of me.
David Fleming
at 3:12 pm
Wow this is getting nasty…
For the record – rye is my drink of choice and has been since the gut-rot I received in summer of ’05 after drinking nothing but rum and coke. The added vanilla extract likely did not help…