Beer and Taxes

The following has been circulated around for a long time. It just resurfaced to me, and I wanted to share it! I wish I knew who to credit it to. :(

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!

How a cup of coffee per week equals 210,000 jobs over ten years

Posted today on CNN.com. Emphasis added:

The White House will unveil reforms to the nation’s international tax code on Monday intended to close loopholes for overseas tax havens and end incentives for creating jobs overseas.

The administration expects these initiatives to raise at least $210 billion over the next 10 years “to cut taxes for American families, increase incentives for businesses to create jobs in America and reduce the deficit.”

What does $210 billion in new taxes mean to Americans? Let’s review.

  • The median U.S. household income is about $50,000 per year.
  • Let’s assume that the typical cost (insurance, office space, pens, etc.) of an employee to an employer is double an employee’s salary. (It varies quite a bit by industry, but this is a fair back-of-the-envelope number.)
  • The “cost” of one $50,000 per year job over ten years is therefore roughly $1 million.
  • $210 billion in new taxes over ten years can result in up to 210,000 less jobs being created, if you assume how that money could otherwise be spent providing a job to 210,000 people for ten years.
  • To compare, only 16 American companies have more than 210,000 employees.

The flip side:

  • The population of the United States is about 304 million.
  • $210 billion in new taxes over ten years equals about $690 per person over ten years, or $69 per year, or 19 cents per day.

Feel free to thank the White House for eliminating the potential of 210,000 well-paying jobs over ten years so you can enjoy an extra $69 per year – about enough to buy one cup of coffee per week.

Depressing, isn’t it?

Is it time for a national sales tax?

I just received the following in an e-mail from NewEgg:

As a result of recent changes in the State of New York Tax Law requiring certain out-of-state retailers to collect and remit sales taxes to the State of New York, we regrettably inform you that Newegg.com must begin collecting applicable state and local sales tax for all orders shipped to New York addresses on or after June 1, 2008.

There’s a good reason why businesses don’t charge sales tax to purchasers who are out-of-state, and the reason can be found on Wikipedia‘s Sales taxes in the United States page (bold text added):

Note: Taxes change, are added or eliminated frequently, so this article is prone to being out of date. If so, please change the page accordingly and cite a source if possible. There are private entities that distribute updates weekly regarding the rules in 11,000 different tax jurisdictions in the U.S.

New York State itself has 81 different sales tax jurisdictions (see this PDF). Complying with hundreds (if not thousands) of local sales tax laws is a huge burden that will have two effects, one direct and one indirect:

  • retailers will incur additional administrative charges in order to comply with all the different tax laws;
  • consumers will pay higher prices as retailers charge more for their products.

Perhaps it’s time for a national sales tax to replace the state/local sales tax rates, giving retailers the ability to streamline operations. After all, isn’t the purpose of government to facilitate commerce, not impede in it? (There are many sensible tax reforms which government chooses to ignore. You can read about them at the Cato Institute‘s Budget and Tax Policy research area.)

Of course, this (or any other tax reform) will likely never happen, because taxing people (and spending their money) is what government power is all about. I’d bet the house that you’ll see a national sales tax on top of existing sales taxes and income taxes before you see tax law getting simpleer.

After all, taking (and spending) your money is what government is all about.