The tax system explained in beer

# Thread: The tax system explained in beer

1. ## The tax system explained in beer

Some of you know I'm an accountant, I found this enalogy sad but true.

Happy tax season!

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 ? 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 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!

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.

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

2. ... don't you have work to do..

3. i'm thirsty

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

Great quote material for this site

I bet he's the 10th man in most groups though !

5. Yup, like it! There's nothing like a good analogy to help explain stuff.

7. ## Economics for Drinkers

This seems like a good time to explain the sub-prime meltdown.

Heidi is the proprietor of a bar. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Heidi's bar. Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items. One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar. However they cannot pay back the debts. Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 80%. The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor. The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties. The funds required for this purpose are obtained by a tax levied on the non-drinkers.

8. it gets more complicated by those that issued the bonds then took an insured position that they would fail

9. Can we beat up ORYX for threadcrapping with another beer analogy?

10. Originally Posted by ORYX
He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
Ahh I see, money owed can be used as collateral.

=/\=

11. Originally Posted by Booger
Can we beat up ORYX for threadcrapping with another beer analogy?
What prompted this response, I'll never know. I'm just going to assume Booger has either A; Been drinking too much or B; 'had' a vacation house in the States and happened to be on the shitty end of the stick during the meltdown.

12. Originally Posted by ORYX
What prompted this response, I'll never know. I'm just going to assume Booger has either A; Been drinking too much or B; 'had' a vacation house in the States and happened to be on the shitty end of the stick during the meltdown.
hey , how come no choice for "all of the above"??

13. Instead of listen to the bar owner new arrangement, how about...

a. each man got 20% off their bills
The fifth would pay \$0.8
The sixth would pay \$2.4
The seventh would pay \$5.6
The eighth would pay \$9.6
The ninth would pay \$14.4
The tenth man (the richest) would pay \$47.2
(every one is a winner)

b. still pay the \$100 bill, but the fifth visit is free.
(tax rebate)

c. each man pay the same, and order \$20 worth of snacks w/ beer.
(increase public service)

d. each man pay the same, and order 25% more beer for random hotties.
(tax incentive for foreign skilled workers, increase productivity...)

14. Cute analogy, but let's not lose sight of the reality that the 10th (wealthiest) man wouldn't pay 59% of that bill in the first place. Even in the unlikely event that he did, he'd take the entire bill and claim it as a tax deduction.

15. Originally Posted by OneTrack
Cute analogy, but let's not lose sight of the reality that the 10th (wealthiest) man wouldn't pay 59% of that bill in the first place. Even in the unlikely event that he did, he'd take the entire bill and claim it as a tax deduction.

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