You Say Potato, I Say Something Completely Different

2010 October 28

by Roy W. Bakos

A few days ago a friend of mine on facebook sent me a message that contained the following story to be read as a parable that would explain our tax system (this story is originally attributed to David R. Kamerschen, Ph.D.  Professor of Economics).  I thought that the following exchange was fairly enlightening as to the differences between those on the left and the right so I have decided to re-post it (slightly edited) here on the Moose.  Enjoy…

Suppose that every day, ten men go out for a couple of beers 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 pub every day and seemed quite happy with the arrangement, until one day, the publican threw them a curly one.
“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20″.  Drinks for you ten blokes will 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 publican 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 that each bloke should now pay.
And so the fifth man, like the first four, – now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33% savings).
The seventh now paid $5 instead of $7 (28% savings)
The eighth now paid $9 instead of $12 (25% savings)
The ninth now paid $14 instead of $18 (22% savings)
The tenth now paid $49 instead of $59 (16% savings)

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 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.

After thinking about this story for a few minutes, I decided to answer with the following:

Roy:
First, the $100 they start with would come overwhelmingly from the labor of the men in the middle. The richest man would own the bar and write off his $59 dollar expenditure in other ways while investing the profits from it in overseas bars that put American Bar workers out of work while profiting from the protection of the free security provided by the guys that collect the taxes. The poor would only be allowed in to have a free sip which would ensure that they would remain beerless but have just enough of a taste for them to keep the hope alive of someday having a beer and there would always be someone outside to put them in jail if they began to trade in unlicensed beer. Of the men in the middle, two out of the three on the bottom would argue with each other about the poor being let in at all and would only drink one beer out of their hundred dollars worth. The third man on the bottom middle would serve as the security guard for the bar with the hopes of using his security guard bill to someday get promoted to bartender. The top three men in the middle would sometimes drink beer and at other times just sit there in fear that the bar owner would move his bar overseas and do anything he wanted them to just so they could keep the bar there.

I believe that this analogy works a bit better in our present system. The big fallacy in the one posted is the part about the super rich getting beat up and moving…they never get beat up. Ever. They move businesses, start businesses, make money, run the financial system, and live wonderful lives almost immune to any repercussions for any of their actions. They are the bar owners in the scenario and the world is very different for them than it is for the rest of us. The fact that they have convinced the mass majority of the 6 billion plus people on this planet that “they are us” and that someone who is probably not one of them would write a tax analogy where they get beat up and leave in the end is a big part of the problem we have. Those are the “elites” that you need to look at…the “owners” from the George Carlin skit that I posted a few months back.

My Anonymous Friend:

You can change the scenario any twisted way you want (which you did) and it just validates even more your outlook on how unfair the world is. Waaaaa.

Roy:

Yes, the world is unfair. The reason that we have government and laws and societies is so we can live together in a situation that is more mutually beneficial than dragging people out of caves and taking whatever we can from them. The Constitution or any laws would not be necessary if the world were fair and people just always did the “right” thing all of the time. To think that the world would somehow become “fair” without any laws is naive.

MAF:

I thought it was a great article explaining how our unfair tax system truly works; very simple way of understanding how the current tax structure penalize those who take risk, work hard, make daily sacrifices, and dear to venture where others will not.
I am sure some will still find a way to think the 10th guy isn’t paying enough or he does not need the money since he already has enough. Failing to realize that it is not the bartender’s job to determine how the 10th guy should spend his money.
Fairness to 5 to the disdain of another 5 isn’t true fair system.
As long as we live on this earth there will always be the rich and the poor. Wealth would belong to some and not to some but we should remember that money is not loyal to anyone, we could change places tomorrow what would be our choice then? Maybe we should desire the same thing for those who are in that position now.

The wealthy pay a truly stunning amount of tax, and there are virtually no exceptions. Anyone who thinks otherwise has been misguided.
I’ll just say that when you make sweeping claims like this you might want to back them up with a little detail. As a general proposition, the wealthiest Americans do pay the bulk of the individual income taxes collected in the U.S. That’s a point worth making, since the belief that the rich pay zip while the little guy gets slugged is the impetus behind the “flat tax” proposal, the stupidest idea to come down the pike since pet rocks.

Roy:

As for fairness, why don’t we just charge all Americans for their taxes the same way by eliminating the capital gains tax and just taxing all income as income? That is my biggest pet peeve (OK, well just one of them)…that the privileged few that earn a majority of their income through capital gains and not salary get to do so at a different rate than I do when I earn my money. Yes the wealthy pay a large amount of tax, no one is disputing that, the dispute lies in why they should not…and don’t give me the “they worked for it” argument exclusively because you can’t tell me that working in a steel mill or on a construction job or as a waitress is any easier than living off of the interest earned on “family money” or getting a stock bonus of 10 to 30 million dollars as compensation for making decisions in a boardroom. I just don’t get it when Conservatives will support subsidies for every business interest out there, using the public treasury to have our military (the biggest “Big Government” program) “protect” US and foreign business interests around the world (Oil, Oil, Oil, Oil, Oil and Oil again) but will go crazy at the mere mention of a minimum wage hike, subsidies for health care, or all of our money being stolen by poor people that refuse to work. That, my friend, is just plain silliness.

7 Responses leave one →
  1. youknowwhoiam permalink
    October 29, 2010

    The rich pay more for government because they get more out of government and impose more on society – nowadays to the point where they practically own both. In their private wonderland, no hideous garish impingement on the rest of us to buy their stuff is too much, and no payment by them for the ownership of society is too little.

    Just what do they get out of their country? Let’s see: No bid contracts, owned and lobbied 2-party political system by design, (successful) attempts to infiltrate every moment of our waking lives with hideous advertising and patterned consumer brainwashing, near-complete control of the media apparatus that “informs” our citizenry, near-complete control via lobbying of the people comprising government, a horrendously bloated military to do their bidding and empire-building, ownership of majority land, wealth, and resources in the entire country despite the obvious iniquity in labor versus payout (with an eye towards constant profit growth, re: wanting to own more), control of employee’s lives via labor contracts structured in a way that is fundamentally exactly the same as any imposing government in the sense that they control our free time and what the employee is allowed to get, with the caveat that the employee is free to leave if they can find better employment (right!) or start a business themselves, and on and on and on.

    In the Libertarian/teabag-gagging mind, there is no limit: A single man should be able to own and acquire all the land on this entire continent all for himself (freedom!), on the basis that he “earned it.” Never mind that ownership of land in the first place is built upon the bones and blood of countless people who were slaughtered for it by our government in a brutal, manipulative, racist genocide with the pretty name “manifest destiny,” and never mind that this ownership is conferred upon and granted to them by that same government that they purport to hate, which of course is the first place they would run to for protection if some vile squatters were found on “their” property, or even if they just needed the land for business ops (eminent domain). They want more more more, and have utilized every corner of the media to ensure that they have a peasant army fighting for them all the way. Advertising works, or else there wouldn’t be so much of it.

    The worst thing about America is that we have no history. Consequently, nearly all of our rich are nouveau riche despite any claims to “old money,” including a fair amount of former white trash who got lucky. They typically have no desire whatsoever to advance the aesthetic beauty of the world we live in, save maybe a contribution here and there to an art gallery or local philharmonic. Say what you want about Europe’s landed gentry – they deserve every horrid word – but they had enough history behind them to have at least reached a stage where they looked down upon vulgarity and tried hard to make their cities beautiful, reaching their height with the Belle Epoque, and then ruining it all (along with millions more lives) with their competitive bullshit in WWI. A simple look at architecture and infrastructure now compared to 100+ years ago shows this. Europe is still fairly beautiful because it has thousands of years behind it. We in America are mostly now in the prefab cheapo “box building” world, with signs and packaging litter everywhere. We have people like Joey Fucillo painted across local buses, people paying the mayor of Indianapolis $5000 to print KFC logos on every fire hydrant in town, etcetera. Again, no care at all for how garish it looks, because for all their money, they have ZERO class. The only concern is for more more more, like the spoiled little brat we all hate.

    We have a society where some white trash piece of shit can mass market sausage, hire people to make it, package it, transport it, advertise it, get all the supermarkets to carry it…et voila! The white trash piece of shit is now rich as shit, with all the airs that money confers and an army of like-minded people defending him. What does this newly rich as shit person do? He wants more, so he games the system to get more. He bitches about his taxes, but then gets them right back in farm subsidies and entitlements and continues to bitch. Society looks down upon the food-gluttonous, but worships the money-gluttonous, which is absurd.

    So there you have it. Your heroes pay more in taxes because they get more and because they impose more. And they don’t want to share this limited world. They want to use it – all of it. Don’t even tell me about your argumentative sacred cow welfare bums. Welfare drops them a pittance existence, often to people who have had work-related injuries or had their jobs shipped to China/India/Taiwan or wherever else people can be bought even cheaper – the ultimate goal of the capitalist. The fact is, we’re all trapped in this system of the rich except for the rich themselves and to some extent the abject homeless and off-the-grid. So don’t talk to me about unfair taxes. You won’t get anywhere. You’ll be immensely successful talking to America’s millions of bell curvers though.

  2. The Grim Sleeper permalink
    October 31, 2010

    An analogy can be taken too far. Our current system in all of its facets has been taken over by people who want to destroy this great nation and con us all into joining a world system or accepting the principles of socialism. I for one hated school and being in the world of all those pompous liberals who were convinced among themselves that they were right about what was best for me and everyone else, even in the face of overwhelming reality to the contrary. Now they are trying to force this upon the nation as a whole? Please put something snarky that illustrates my refusal to accept this on my gravestone. We have neither the time nor the luxury of parsing fables. If you think that socialism or any part of it is acceptable and can be mixed with freedom, you are mistaken. Check the ratios of people imprisoned to the free in the U.S. and compare them to other countries. The tax system, the prison system, the education system , the political system, The monetary system, the court system and even the way you pay for things is being used against you to steal your freedom. It is going to take a great deal of sustained determination and FAITH to turn the mighty river of destiny back on course and get it once again producing power instead of destruction.

  3. Dan permalink
    November 1, 2010

    The main reason Your Anonymous Friend’s analogy doesn’t reflect reality (aside from the fact that all simplistic analogies fail to account for all the complexities of real situations) is that it leaves out a key component of our tax system: income. Sure, as a direct comparison of taxes paid, the rich guy pays far more than the others, but in our system he also necessarily makes geometrically more income. More to the point, taking 25% of $40,000 hurts that person a hell of a lot more than taking 35% of $400,000.

    It recalls to mind the Chris Rock routine about prenuptial agreements. He pointed out that only the rich seem to get them, but actually the rich don’t need them; it’s the poor who need them. As he said, “If I make $30 million and she wants to take half, that’s no big deal; I’m still rich. But if I make 30 THOUSAND and she wants half . . . bitch might have to die.”

    It’s also worth pointing out that taxes don’t pay for a beer at a pub. They pay for fire and police services, roads and bridges, clean water, prisons, and that mighty military (which, incidentally, the rich guy sends where HE wants, and then makes a killing (pun) from military contracts).

    Throw on top of that the idea that, as you pointed out, the truly wealthy make most of their money in capital gains, which are taxed at 15%. Goddamn, what I wouldn’t give to have my main source of income taxed at only 15%. But it’s almost universally true that the lower half of the income distribution table has no extra money with which to invest in capital gains revenue sources.

    So to adjust the above analogy for accuracy, the 7th guy pays $7 per day for his beer, and earns $28 per day. The 10th guy pays $59 for his beer, but earns $393.33 per day. In other words, the 7th guy has $21/day left to buy food and pay rent, save for retirement, etc. etc. The 10th guy has $334/day left to buy those same things.

    One last point, because I have a feeling this will become one of Roy’s new big pet peeves. With all the whining about Social Security being unsustainable (which isn’t quite as true as politicians would have you believe), the Republicans predictably argue that the only way to save it is to raise the retirement age, cut benefits, or privatize. Fun fact: the FICA rate maxes out at 6.2%, but the wage base cap is $6621. I.e., at the highest FICA bracket, at an income of $106,800 you are taxed 6.2% (or $6621) for Social Security. A person earning $20 million also pays $6621 per year toward SS (or 0.033% or thirty-three thousandths of one percent). You want to save SS and make it sustainable indefinitely? Remove the wage base cap. 6.2% of $20 million = $1.24 million, or the equivalent contributions of 187 people earning $106,000/year.

  4. November 3, 2010

    Dan,
    You were right. That is now my newest pet-peeve. I agree, let us save Social Security by removing the cap. Now. Thanks for giving me something new to be angry about…

  5. Isaypotatoyousaygiveittome permalink
    November 5, 2010

    You can spot the Progressives onboard if you ever find yourself drifting on a life raft with them in the middle of the ocean. They’re the ones who’ll insist it’s compassionate to equally divide and eat all the cans of sardines right away instead of using any for fish bait. And they’ll proclaim that all who know how to swim are thoughtless bigots.

  6. mike permalink
    November 6, 2010

    Grim,
    Thanks for your comment. Now as to comparisons to the rest of the world:

    - we spend twice as much as any other nation on healthcare, even the nasty socialized ones like Britain, and have no better results. Americans don’t live longer, are no healthier, and die at the same rate for diseases (other than a few specialized cases). Since that is the case, shouldn’t we get half our money back?

    -I don’t have a source for you right now, but I am fairly sure we have more citizens in prison than any other nation in the world, even China. Most of them are in prison for nonviolent/nonpolitical crimes, but there you have it.

  7. November 21, 2010

    Grim,

    “The United States has the highest recorded incarceration rate in the world.”

    http://www.kcl.ac.uk/depsta/law/research/icps/downloads/wppl-8th_41.pdf

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