The Tax System Explained In Beer


I just received one of those chain emails that we all just delete without reading (sorry Mom, nothing personal). The title however, caught my attention, so I went ahead and read the email and found it to be spot on. In a rare departure from my normal routine, I’m posting the email below (I would happily give credit to whomever wrote it, if I knew who that was, but I don’t, so I won’t).

The numbers used for the example are a little off compared to what the tax percentages are today, but they’re close enough to make the point. As is so aptly pointed out at the end of the email:

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.“.

The Tax System Explained In Beer

Suppose that every day, ten men go out to the neighborhood bar 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 ? 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 dollar out of the $20 savings,” 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!

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.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

Yes, it’s a little cheesy, but it’s generally correct, which is why we need to start taking tax reform seriously. Most would agree that there are far too many deductions, loopholes and credits in the current tax code. The problem is that people have a different definition of the phrase “fair share”. The right wants to eliminate deductions and lower tax rates accordingly, so the effect is revenue neutral and the playing field is more level. The left wants to raise rates on the rich and then, of course, spend the “extra” money.

This kind of mentality reminds me of a little story I read a while back (once again, don’t know where it came from or I would give appropriate credit). It goes something like this:

Ivan and Boris were brothers. Ivan owned a goat, Boris did not. One day, Boris found a magic lamp and when he rubbed it, a Genie appeared. The Genie offered Boris one wish, for anything he wanted. Boris reflected on the fact that Ivan owned a goat and he did not and as such, decided that would be the basis for his wish.

Boris wished for Ivan’s goat to die.

If anything can describe the “tax the rich” crowd, this is it.

Comments are welcome. Please feel free to keep the stupid ones to yourself.