Below was taken from www.soundmindinvesting.com
“(The original version I saw was credited to David Kamerschen, an economics professor at the University of Georgia.) I updated the numbers to reflect the most recent IRS tax data—before any of the promised future tax cuts/increases take effect.
Perhaps this will do a better job of communicating the frustration that I, and many others feel, when a discussion of “fairness” in taxation captures the political spotlight.
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 federal income taxes, it would go something like this (rounded to nearest dollar):
The first two men (the poorest) would pay nothing.
The third man would pay $1.
The fourth man would pay $2.
The fifth would pay $3.
The sixth would pay $4.
The seventh would pay $6.
The eighth would pay $8.
The ninth would pay $14.
The tenth man (the richest) would pay $62.
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. “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 now cost just $80.”
The group still wanted to pay their bill the way we pay our taxes. The first two men were unaffected … they would still drink for free. But what about the other eight men—the paying customers? How could they divide the $20 reduction so that everyone would get his fair share?’
They realized that $20 divided by eight is $2.50. But if they subtracted that from everybody’s share, then the first four men 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 in roughly the same proportion, and he proceeded to work out the amounts each should pay! And so:
The cost to the first four men, who paid little to nothing, was unchanged.
The fifth man now paid $2 instead of $3.
The sixth now paid $3 instead of $4.
The seventh now paid $5 instead of $6.
The eighth now paid $6 Instead of $8.
The ninth now paid $11 Instead of $14.
The tenth now paid $50 Instead of $62.
Each of the six was better off than before. And the first four continued to drink for little or nothing. But once outside the restaurant, the men began to compare their savings:
“I only got a dollar out of the $20,” declared the fifth man. He pointed to the tenth man, “but he got $12!”
“Yeah, that’s right,” exclaimed the sixth and seventh men. “We only saved a dollar, too. It’s unfair that he got twelve times more than we did!’
“'That’s true!!” shouted the eighth man. “Why should he get $12 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. The 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 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 college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, demonize them for not paying their fair share, complain they get tax breaks they don’t “need” at the expense of those who do, and they just may not show up anymore.”