Updated: December 8, 2012 6:28AM
Several weeks ago, I was one of six panelists at a collegial meeting with some very serious small-business owners in Dallas to share my views and to answer and discuss questions on the economy. I always enjoy having an opportunity to show off among a coterie of ivory tower academics, none of whom ever has been down on his knees in the dirt or gotten soot on his hands or sweat on his brow. I teased these starchy academics a bit more than they were accustomed to, but all five of these fellows were good guys, and one of them sent the following to me. It’s worth sharing; however, the author is unknown.
Five evenings a week, 10 friends have beers together at their neighborhood bar. The beer bill always comes to $100, and they have decided to pay their fair share, just as they pay their taxes. The first four (the poorest) pay nothing. The fifth pays $1. The sixth pays $3. The seventh pays $7. The eighth pays $12. The ninth pays $18. And the 10th (the richest) pays $59.
The friends continue to drink their beer every night and are pleased with the arrangement until the barkeep says, “Because you’re all good customers, I’m going to reduce your beer costs by $20, so drinks for the 10 of you will cost you guys only $80.”
Now the friends still want to pay their bill the way they pay their taxes, so the first four friends are unaffected; they still drink for free. But how could they divide the $20 windfall so everyone would get his fair share? They realize that $20 divided by the six friends is $3.33, but if this were subtracted from everyone’s share, the fifth and sixth friend would end up being paid to drink their beers. So the barkeep suggests it would be fair to reduce each friend’s bill by a higher percentage the poorer he is and follow the principle of the tax system we currently use. He proceeds to work out the amount that each should pay.
The fifth friend, like the first four, now pays nothing — a 100 percent savings. The sixth now pays $2 instead of $3 — a 33 percent savings. The seventh pays $5 instead of $7 — a 28 percent savings. The eighth pays $9 rather than $12 — a 25 percent savings. The ninth pays $15 instead of $18 — a 22 percent savings. And the 10th pays $49 instead of $59 — a 16 percent savings.
Each of the six is better off than before, and now five friends are able to drink for free. But once outside the bar, the friends begin to compare their savings. The sixth man is annoyed that he only got $1 out of the $20 savings and points to the 10th man, angry that he got $10. The seventh man exclaims: “That’s right! Why should he have gotten back $10 when I only got back $2? The wealthy get all the breaks!” However, the first four shout in unison: “We didn’t get a thing at all! The system exploits the poor!”
So the nine friends surround the 10th friend and beat him up. The following night, the 10th friend fails to show up for drinks, so the nine friends sit at the table and have their beers without him. But when it comes time to pay the bill, they discover that they only have enough money among them to pay half the barkeep’s tab.
And that is how our tax system works. The folks who pay the most in taxes appear to get the most benefit from a tax deduction, but their taxes are reduced by a smaller percentage. Tax them too much or attack them for being wealthy and they may not show up for beer. Or — as they do in states with high taxes, such as California, New York and New Jersey — they may move to states with lower taxes, such as Florida, Nevada and Texas. And in the case of corporations, their tax lawyers may recommend that they move some of their business overseas. And that’s just how our cookie began to crumble.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.