Howard Mark’s “The Tax System Explained in Beer”
Here’s the best possible explanation of Tax System vs Socialism vs Capitalism (vs Psychology), in Mark’s latest memo “Political Reality Meets Economic Reality”
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 (by taxpayer decile), it would go something like this:
– The first 4 men (the poorest) would pay nothing.
– The 5th would pay $1.
– The 6th would pay $3.
– The 7th would pay $7.
– The 8th would pay $12.
– The 9th would pay $18.
– The 10th man (the richest) would pay $59.
So that’s whay 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’re 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 unnafected. They would still drink for free, but what about the other six? How could they divide up the $20 windfall so that everyone would get his fair share?
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 suggest new lower amounts each should now pay.
And so the fifth man, like the first four, now paind nothing – a 100% saving.
The 6th now paid $2 instead of $3 – a 33% saving.
The 7th now paid $5 instead of $7 – a 29% saving.
The 8th now paid $9 instead of $12 – a 25% saving.
The 9th now paid $14 instead of $18 – a 22% saving.
The 10th now paid $50 instead of $59 – a 15% saving.
The first four continued to drink for free and the latter six were all better off than before. But once outside the bar, the men began comparing their savings.
“I only for a dollar out of the $20 saving,” declared the 5th man. He pointed to the 10th man, “But he got $9!”.
“Yeah, that’s right,” exclaimed the 6th man. “I only saved a dollar too. It’s unfair that he saved nine times more than me!”
“That’s true!” shouted the seventh man. “Why should he get $9 back, when I got paid 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 day the tenth man didn’t show up, so the other nine sat down and had their beers without him. But when it came 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 friendlier.
And then Marks wraps it up objectively:
“The numbers may not be exactly right, but the idea is. The unarguable bottom line is that everyone’s view of fairness of the tax system – like most such matters – depends largely on the angle from which you look at it.”
Here‘s the link to Howard Mark’s full text.
A life-changing book says it all. From Robert Burton’s “On Being Certain”:
“To expect that we can get others to think as we do is to believe that we can overcome innate differences that make each of our thought processes as unique as our fingerprints”
Burton argues that there is enough research stating that a lot of what we believe, “see”, our convictions in general – faith, political ideology, empathy for others-, are not a choice, but different ways brains were formed, in our DNA.