In my explanations of the Laffer Curve, I’ve shown evidence that high tax rates discourage productive behavior and boost the underground economy.
And if higher tax rates are sufficiently onerous, the resulting reductions in taxable income can completely offset the revenue-generating impact of higher tax rates. Indeed, this is what’s already happened with the “Snooki tax.”
And the same thing happens in reverse. If lower tax rates lead to a big enough increase in taxable income, the government actually collects more revenue – which is exactly what happened when the top tax rate was lowered in the 1980s.
I’ve also tried to explain, shifting from economics to philosophy, that confiscatory tax rates are unfair and immoral. And I’m glad to see that most Americans agree, with 75 percent of all people saying that nobody should ever face a tax rate of more than 30 percent.
Notwithstanding that polling data, though, I fear that many people don’t really understand the economics of taxation. So I’m happy to share this little story that periodically winds up in my inbox.
===============================================
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?
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!
And that, boys and girls, journalists and government ministers, 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.
===============================================
Very well done. Reminds me of the PC version of the story about the ant and the grasshopper, or perhaps the joke about using two cows to explain various economic and political systems.
And if you like those, you’ll appreciate this modern fable about bureaucracy, featuring an ant and a lion.
Hence why you are one of my all-time favorites Dan!! Now THIS I can both understand AND explain. And I will happily do so with real live props of Guinness. Thank you for making this palatable!
Now consider the situation where the men gather not to drink beer, but to build your house, your iPhone, build your car, your weekly accupuncture, find a cure for your eventual cancer etc., and you have a close parallel to economic activity.
This calls to mind a Robert Heinlein quote favored by the good professor.
Let’s be a little more “fair”. How can we possibly expect government bureaucrats who have never worked as private citizens in the private economy to understand people who do? In the private economy, when increased endeavor gains nothing, people stop that extra push. If their work is not effective enough, they and/or their company go bankrupt. Government bureaucrats, and elected officials, without private sector experience, can never be laid off because their agency does not perform, witness the Departments of Education and of Energy. We are, in effect, asking a fish which running shoe would work best for us.
[...] http://danieljmitchell.wordpress.com/2012/03/18/the-tax-system-explained-in-beer/ [...]
Its old (the former example was with dinner), but so damn accurate and so to the point. Explains exactly the Bush tax cuts and the impact that had on the average person. I just can’t understand why this can’t be the first example taught in every school economics class throughout the country.
[...] Many of you have read this or variations of it but I thought it would be fun to read it again after I came across it on Dan Mitchell’s Site [...]
[...] The Tax System Explained in Beer « International Liberty [...]
This argument is completely flawed;
A) Nowhere does it talk about the 10th man being worth more than all 9 combined.
B) It also doesnt talk about how the 10th man’s income has went up nearly 300% while the other 9 men have only had an increase of about 5% over the last 30 years.
C) During that same 30 years productivity increased by 141% and corp profits increased by 100%, meaning its not b/ the other 9 guys arent working their asses off.
D) The taxes paid by that 10th guy is the lowest its been in over 50 years
E) Finally, did the beer story talk compare how the 10th guy controls more wealth now and the other 9 guy have less wealth in statistics not last seen since the mid 1920′s!?
Final omission from the beer story…
F) 1929 is important in our history. Its commonly remembered as the time where Wall St crashed and brought an end to the “Roaring 20′s”. Quickly followed by the “Great Depression” which lasted nearly 12 years and had unemployment ranges above 25-30%
Point – The 10th guy should quit crying about paying an additional $10. His *THUMB* literally is worth more than the bottom 5 guys combined who are busting their ass working to buy shoes so they can meet their friends at the bar.
#EducateYourself
#IndependentAnalysis
(Quick Note) A) Not more than all 9 “combined”, just more than all 9 guys
Um, Davide? The tenth guy didn’t cry at all. In fact he found it quite fair that he was basically footing the bill of the lowest four (and then five) so they could all enjoy drinking together. Seems like he was quite the humanitarian… until they beat him up for “saving” more than they did.
Flawed ? ? ?
The 10th guy was more than happy to leave the payment arrangement the same way. He just didn’t appreciate getting BEAT UP for it.
Hey Davide,
It sounds like you’ve had too many free beers off the kindness of others. Maybe the tenth guys THUMB ~IS~ more productive than the other five. You moan and complain about what the tenth guy HAS and not give a thought about what the tenth guy HAS BEEN GIVING YOU for the last 30 years. Davide, buy your OWN DAMN BEER, or go look for another bar that doesn’t mind freeloaders and complainers. Ingrate.
I just turned this into a graphic and posted it on my facebook page; it’s a great “lesson about fairness”.
Hal – Quite spiteful yes? Firstly, let me explain my position. I am the “10th guy” and have been for a good few years. My family being immigrants (legal, don’t worry) grew up in the 2nd-3rd guys condition. Just because someone is at the “top” doesn’t necessarily mean they’re more productive. Sure, some ABSOLUTELY are! And of course, there’s those on the “bottom” that are lazy, just as well as extremely productive (ever seen people in China bust their ass for 12 hour days 6 days/week? Look into Foxconn).
In regards to the “Has been giving [the other 9 people]“, do you actually know the tax code? I don’t mean that in a demeaning way, I mean genuinely. Have you SEEN how the tax code works? Its ENORMOUSLY in favor of wealthy individuals. Examples…
Investment real estate – Did you know you can sell a property for profit, and do a 1031 tax exchange and not pay a “SINGLE” dime in taxes *EVER*? Capital gains (15%) are irrelevant. Plus, there’s this additional thing called “accelerated depreciation” which practically triples to quadruples your tax write offs for about 2-7 years…in which case the property is sold and traded for something else to repeat at a nearly 15-20% effective tax rate (vs. 35% regular income rate).
Stocks? Dividends taxed at 15%. Ok…fair argument that its an investment. I’ll go along with that argument. But what about Hedge Fund managers. 15% too? Because the “manage” the stock? C’mon. It what world can you work 40+ hours and still be taxed at 15% for your *PRIMARY INCOME SOURCE*. Last time I checked, a factory worker, teacher and police officer get charged at least double that!
The tax code is *EXTREMELY SKEWED* to favor higher income individuals & companies.
So Hal, next time please bring actual facts and statistics to the argument. Maybe even charts? I love charts!! My point was that the example was flawed because it doesn’t tell the whole story. I bought my own beer and then some. But coming from a perspective of the other 9 people throughout the stages of my life, it becomes INCREASINGLY DIFFICULT to buy your own when the 10th guy is yanking your glass away from you. [Like my analogy there? I can do it too!]. Lets try watching the silly name calling too.
FYI – I do investment & commercial real estate for a living and have paid less than 10% effective tax rate for over 3 years. I’m not a Republican or a Democrat – I’m independent. I judge people individually, so no this is not based on political influence/opinion.
Allyson/Weary – My apologies on the “quit crying” part. I copy & pasted that from a debate with a friend online and it was in reference to what was in the discussion.
in a 1031 exchange the proceeds of the sale MUST BE invested within a set period of time (don’t know what it is, sorry) in order to avoid taxation.
I’ll agree the TAX CODE is a joke. Especially for those who can’t pay accountants and tax attorneys a “bundle” to find all the loopholes. This is why I’m in favor of a FLAT TAX ON CONSUMPTION. I’m not smart enough to determine the %, but if everyone paid the same % with an allowance for those who are LEGITIMATELY poor, we’d all be able to experience the American dream without any bitterness one way or another. We’d also ALL be able to notice when the government spends more than it takes in and has to RAISE the % it is taxing us. That would be a real TAX REVOLT ! !
This also means, of course, in the “beer scenario” that 5 guys would have to pony up some loot, wouldn’t they? Now, what % of those 5 guys would squeal like a stuck pig if they had to do that? And, God forbid, pay consumption taxes on it as well ! !
Weary – Correct, it must be reinvested into real estate (land, apartments, office, whatever) within a 180 time frame.
As for the Flat Tax (a la Herman Cain’s 999 plan), I actually agreed and thought it was a good idea. However, after reading quite a bit I found out it’ll actually be WORSE. I’ll try to explain why, but here’s a good article & graphic [http://www.harikari.com/politics/tax-policy-center-analyzes-cains-regressive-999-plan.html].
Take 3 people at different income levels. $30k, 100k and $1M.
$30k is SEVERLY hurt and pays almost 10% *MORE* in taxes. The primary reason behind this is b/ the $30k/yr person or family *HAS* to spend more on rent, food, gas, etc. ALL of that is TAXED, along with their income rate.
$100k is slightly hurt and pays almost 2% more…not that big a deal.
$1,000,000 is *LOVING* this plan!! Not only are they paying a flat tax of 9%, but they pay 9% on what they SPEND! Think about it. The $1m guy doesnt buy a large propotionate amount of food do they? Higher income individuals INVEST their money, mainly because they have more of it.
As I said, statistically a flat tax would never work. It has to be tiered for higher income individuals. Otherwise literally everything; Medicare, medicaide, social security, etc can go out the window. 70%+ of the population dont want ANYTHING changed about those programs – which I disagree. They should be reformed sooner vs. later.
Btw, as I said Im independant. I try to view non biased sources for this info. Economists & scientists in general are very anti-politics with there opinions…but not always.
Not in favor of Herman Cain’s concept of a flat tax at all, for just the reasons you outlined (you’re quite well-schooled).
I was referring to a FLAT 22% on every purchase.*NO EXCEPTIONS*. That means all food, cars, rent, real estate, boats, jewelry, planes, whores WHATEVER will be taxed when purchased. Some call this a NATIONAL SALES TAX. With one slight aberration –
EVERYONE would get a check from the government at the end of the year for $6,600 (22% of $30,000) to reimburse them for a subsistence level of food, gas, rent, etc. This should quiet the “poor” argument and could also be adjusted for the State of your residence, to allow for more expensive living costs in some areas.
This tax eliminates the IRS, tax accountants, tax attorneys, the need for IRAs, 401Ks and other tax-dodging programs and schemes. This allows and promotes SAVING and INVESTMENT automatically, because WHAT YOU DON’T SPEND YOU KEEP.
I’m a Libertarian, a concerned American, and a staunch supporter of FISCALLY CONSERVATIVE principles. We’re going to have to bite the bullet sometimes . . . the sooner the better.
Hmm. Never read an article on anything like that. I’d love to see an economist (non-biased) write an article of why it could/couldnt work.. I agree its better to bite the bullet sooner vs. later – the problem is that politicians cant keep other peoples (aka lobbyists) money our of there pockets! If you ever come across an article please do post it – I’d love to see another viewpoint of how it would work!
However, I cant see it ever coming to fruitition no matter HOW good it looks on paper. Govnt would never let the IRS be gone – kind of the same argument with the war on drugs (employs too many people to end).
What this story misses is that if this were really taxation and the government as we know it, the bar owner would refuse to cut his income. Therefore, it would be necessary to “pay” for the $20 bennie given the party of 10 by having the other customers pay for this benefit.
The other customers would complain and the bar owner would then say “If you change your behavior to please me and come in every day and bring 9 of your friends, you can all get the same benefit”.
Based on this incentive, 50% of the customers group themselves in to 10 member groups and come in each day with nine of their friends. Since they were coming in only four days a week, preferring to spend Friday nights with their families, this raises sales by 10%.
However, in order to make up the lost revenue, the price of a beer increases to $11.90.
“Hold on”, say the low income people paying this new rate who make up 20% of the population, this is unfair, we should receive a “credit” because we should not have to pay for the beer bennie of people richer than we are. The credit is granted, thus, decreasing the pool paying for the revenue loss. The unsubsidized price of a beer is now $13.38.
Result:
The middle class light beer drinking people now pay 3.38 more for their beer than the rich heavy drinkers. And 50% of the bars patrons who used to spend Fridays with their families have now been “incentivized” to be in the bar instead.
Excellent view Suzanne.
Its interesting how a metaphor pointing out the RIDICULOUSNESS (is that a word?) of how those that PAY NO TAXES, somehow feel like they have something coming when a TAX CUT is declared and how that culture of ENTITLEMENT has and will continue to CHASE AWAY those that pay the bulk of the costs of running our great country.
And, ironically, that bottom UNTAXED 50% wouldn’t understand the metaphorical consequences of that 10th man going elsewhere. That’s the tragedy of this great metaphor.
[...] on March 18, 2012 at 8:46 am The Tax System Explained in Beer « International Liberty [...]
[...] favorite political jokes tend to be parables, such as using beer to explain the tax system, the PC version of the story about the ant and the grasshopper, the joke about using two cows to [...]
I am sorry. But last week the government proved just how incompetent they truly are and how our futures are seriously in jeopardy.
The decision to NOT close post offices in a business that loses billions every year? How are they going to make the tough decisions about Medicare, S/S, and health insurance. We are screwed!
[...] favorite political jokes tend to be parables, such as using beer to explain the tax system, the PC version of the story about the ant and the grasshopper, the joke about using two cows to [...]
Davide, how does the tax code favor the rich, the first 4 paid nothing, zip, nada, goose egg, 0 seems it favors to poor, they get a free ride.
Brad – Absolutely not true. The beer example is cute, fun and tries to explain the tax system using a metaphor everyone can relate to. However, if you really look at how the tax system works, its HIGHLY skewed in favor of high net worth individuals.
…or to be more clear, it favors anyone who is *NOT* a W2 (aka regular employee).
In fact, Ill give you real life examples.
1-Cousin makes $100k. Works overtime. Has a wife, 2 kids, rents a house. Lives within his means (I’ve seen all his figures). Being an employee for a crane company, he pays nearly $35-40k in taxes BY HIMSELF AFTER WRITE OFFS (kids, day care, etc). That’s both state & federal. He also pays sales tax for all his food, gas, etc.
2-Myself. I make more than my cousin. I’m an “independant contractor”. I get around the self employment tax (14% in California) by making all checks payable to my LLC ($800/yr). Then I pay myself a “bonus” from this LLC, avoiding the 14% tax. But wait, there’s more! Because I’m in real estate, I get to write off *EVERY SINGLE THING at 35%+*. This includes gas, food, events, car, insurance, supplies, etc. In fact, since I have a computer at home (who doesnt), I also get to write off nearly 20-30% of EVERYTHING that is related to my home ON TOP of my taxes/insurance/interest from mortgage. If I spend $10,000 to rehab my kitchen, I get to write off 30% of it…at a 35% tax bracket, that means I make $1050 *FOR REMODELING MY KITCHEN!*
I once went to Florida with some friends and collectively we spent over $6000. I personally only spent about $1500. Because it was a “work” trip (I worked 4 hours a day for 2 days…big deal) I got to write off the full amount – $2100 credit ($6000 x 35%).
I spent $1500 and *SAVED* 2100 by going on vacation!?!?
3-I have a client who makes a large sum of money (nearly $400k). He is about to become a partner with his accounting firm. He will get a raise to at least $500k/yr. The reason hes MOST excited is b/ he’s currently paying 40%+ in taxes. The *INSTANT* he can change his W2 status to something else, he can write off EVERYTHING – vacations, gas, food, gifts, etc. All he has to do is claim that its “work related”…and its 100% legal.
Again, the tax system highly favors those who are NOT W2 employees.
If you add in the aspect of compounding interest, its very easy to see how wealthy individuals become wealthier much more rapidly than someone can raise their own net worth.
[...] fable, then you can see if they’re ready for more advanced stories, such as the one about using beer to explain the tax system, the joke about using two cows to explain various economic and political [...]
Don’t worry Davide, the IRS will now find you now
Bill,
I have no worries. IRS is fully aware of all my LLC’s, write offs, income, etc. Everything I do is 100% legal. Others before me have pushed laws to make them legal to my benefit at the expense of the 85%+ of people who are “regular W-9″ employees. If that concept is too difficult to understand, I highly suggest speaking with an educated tax attorney/accountant and ask them if anything I mentioned is illegal.
Of course, EVERYTHING you do isn’t legal, Davide, especially if you’re writing off a kitchen remodel, non-working “events”, or food for your family. As you boasted about writing off a lot of the stuff that the IRS will call you on in an instant. Only the work mileage on your vehicles is deductible and driving TO THE OFFICE is not considered part of your work mileage.
I’m retired now (thank you Obama), but as a new homes sub contractor and my wife working in real estate in the People’s Republic of California, I could write off a lot, but there is a lot I couldn’t write off without being shady about it and risking audit. Incidentally, I’m divorced now, but my wife used to go on and on about how her accountant was so much smarter than mine because he could write off this and write off that. Well . . . she got audited and hit with a huge tax bill with penalties and interest over several years, couldn’t pay it all in time, got her home liened, and worked on paying that off for many many years. I do understand, many of the EXPENDITURES one has when they are self-employed are legitimate costs of running a business (even including seminars at expensive resorts), but these aren’t costs the W-2 worker has either.
Forming an LLC to avoid the double taxation of the sole proprietor (being taxed as an individual as well as an employer) is fine, but the minute you are “awarded” a bonus. That’s income and the LLC has to pay employment taxes and YOU have to pay taxes on that income. Calling something a “BONUS” doesn’t negate the taxes owed on that bonus. The main advantage of an LLC is to LIMIT the LIABILITY your business exposure has on YOU and YOUR PERSONAL ASSETS. That’s its purpose.
I’ll close with an old axiom. “Become self-employed and you only have to work half days . . . and you get to pick which 12 hours”.
Weary,
In regards to where I learned what I know regarding my write offs, I took a seminar (twice, put on by two completely different CPA’s) which demonstarted what is fully legal. Before writting anything off, I ask my accountant who used to be an IRS auditor for nearly 10 years. He’s pretty much the most straight-arrow-legitamite accountant I’ve ever met which is why I stay with him.
Because I have a home AND an “office” office, literally once I leave my house I can write off everything with my car. I claim I use my car 90% for work – which is about what I do. 90% of repairs, tune ups, oil changes and gas. In OTHER businesses, yes you are correct, going TO work/office does NOT count. But, that’s one of the loopholes that exist for my benefit. Because that home office exists, yes I can legally write off my water, PG&E, etc bills as well as a remodel to my home (a portion of it, not the full thing). Ie. My home office accounts for roughly 10% of square footage, so I can write off 10% of a remodel and other bills at my tax rate. Again, I’m not the professional, I just go by what two others have told me and my accountant has ensured me is 100% legitamite. My broker HAS been audited and did pretty much the exact same write-offs I did and he came back clean as a whistle. (Note, I havent done any remodel, that was only an example).
As for the LLC, again whether it be a bonus/regular pay/etc, all taxes that are due are done. In regards to if the 1-3% employment tax has been applied is what I leave to my accountant.
My general point going back was that the system is flawed to favor those who are not W2/regular employees. Yes, if youre independant (i.e. contractor or real estate broker), yes you get a ton of write offs but there is a cost of doing business. But mathematically speaking, once youre income increases so does your return (due to low taxation) at an exponential rate.
Btw – I like the quote. It sounds like my life for the last few years! Haha
[...] The Tax System Explained in Beer [...]
[...] this fable seems familiar, you may be thinking about the post that used beer to explain the tax system. And if you prefer your irony on the 5th-grade level instead of the 3rd-grade level, here’s a [...]
[...] How to explain the tax system with beer [...]
[...] this fable seems familiar, you may be thinking about the post that used beer to explain the tax system. And if you prefer your irony on the 5th-grade level instead of the 3rd-grade level, here’s a [...]
[...] And everyone seems to like this beer-centric explanation of the tax system. [...]
I find it interesting that in the story, the rich person is the only one to understand percentages. Cheers to Davide to exposing the slant in the tax code. A different ending to the story could be what’s actually happening. The tenth takes his/hers savings and imports beer from a third world country where regulations and workers rights are minimal and putting the local pub out of business.
[...] only downside – as shown in this parable about beer and this great Chuck Asay cartoon – is that the scam only works so long as there are people [...]
[...] I picked this up at Dan Mitchell’s site. [...]
[...] The Tax System Explained in Beer 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… [...]
[...] only downside – as shown in this parable about beer and this great Chuck Asay cartoon – is that the scam only works so long as there are people [...]
[...] previously shared the famous parable that uses beer drinking to explain the tax system and here’s a funny video of a comedian talking about taxes and [...]
[...] just read one by him explaining the tax system with an analogy of beer drinking. It was way too good not to share. It not only covers how the current tax system works, but [...]
Loved analogy! I’ve got to share.
So if they all paid the same it would be $10 each. An amount only 3 of them could afford. So they would then have to switch to the $10 a pitcher beer to make it even slightly manageable for everyone to afford their equal rate, and that would still be horribly debilitating on the budgets of 40% of the people pushing them further into poverty. And since we are not talking about beer we are talking about defense budget, federal regulators, roads, schools, law enforcement, government agencies, and public assistance programs that reduction in services would be 1/10 of what was offered before and now the bottom 40% need even more help because they high tax rate makes it so they can’t afford the basics to get by. Because at least 50% of the people are already making below the livable wage and increasing their tax debt is going take from the money they need for food, housing, gas etc and it is going to make it near impossible for them to even hold down the minimum wage jobs they have. Good by all the 1st world advantages we have.
I’ve seen this on a lot of right leaning sites and the big thing they leave out is that our country and economy is not a beer. For example these men are still getting the same amount of drinks but they are paying less. When it comes to our tax system the GOP likes to cut tax so that in a few years they can say what we can afford. Now imagine if the bar owner cut their tab but in a few weeks lower the amount of items they can get would that really be a gain?
I don’t know about the rest of you….but if I go out with friends that make significantly less money then I do…I gladly pay for the entire bill………I even insist on it.
I have no problem with the tax system. What ever. My question is this, why do I have to watch the tenth man on tv having fun? The tenth man should drink his beer in private along with the rest of us and mabey he wont get beat up so much.
[...] this fable seems familiar, you may be thinking about the post that used beer to explain the tax system. And if you prefer your irony on the 5th-grade level instead of the 3rd-grade level, here’s a [...]
[...] do just that. Therefore, I’m including a link to one of this fellow’s blogs from last spring, The Tax System Explained in Beer. If you choose to read it, click on a few of his other archived links while you’re there; I spent [...]
The story is flawed in the point that the end is not correct, as it assumes that the assets of the ten’th member diaspear. But what happen when the assets are distributed to the nine people? Also, assuming that the 10th person get’s his income from the other five who have income and not from extraterrestians, then those can save this. This just to say how over-simplification can lead to the contrary that was intended. i love the story, though
[...] Heck, it’s also what we see in the PC version of The Little Red Hen. And the same theme can be found in the amusing anecdote that uses beer to explain the corrosive impact of a “progressive” tax s…. [...]
[...] Heck, it’s also what we see in the PC version of The Little Red Hen. And the same theme can be found in the amusing anecdote that uses beer to explain the corrosive impact of a “progressive” tax system. [...]
[...] Read more on: http://danieljmitchell.wordpress.com/2012/03/18/the-tax-system-explained-in-beer/ [...]
[...] only downside – as shown in this parable about beer and this great Chuck Asay cartoon – is that the scam only works so long as there are people [...]
Davide
I disagree on your generalizations and how you compare to your specific lifestyle and work. There are variations and different factors on how each business run or making a profit. I am also an independent contractor. I carefully and under the advise of my accountant, only deduct those expenses related to my job that I can legitimally justify. I put a lot of hours, stress, money into my job with the objective to make a profit. If times are bad and do not make any money the government and noby pays for my beer. I also would not expect anyone to do it!!! Are you generalizating that all small businesses and independent contractors wealthy and have your lifestyle?. Or are you implying it is wrong to be wealthy and you should pay more. I think what we can do is asking people especially those who complain is to volunteer to pay more for what they perceive they should. If you feel you are not paying enough and you are deducting many expenses that are not fair; then you should make your own fair of payments. Please be careful how you make your comparisons and what you are talking about. Many of the things you shared that you get to deduct I will be afraid to even deduct because of being audited. Also if one is a W-2 employee then it is the employer who bears the overhead and payroll expenses of running a business that an independent contractor doesn’t have. Good Luck!
Hi Auri,
That’s quite a loaded question you placed there. Do I think all independent contractors are ["living the life"] or do I think being wealthy is wrong? Well…neither. That’s like asking if you would rather be a slave laborer and work 100+ hrs/week to have a job or if you would like to be a bum on the street and not work at all.
Im not generalizing that all independent contractors are wealthy or live a particular lifestyle. Im *absolutely* not saying that there’s anything wrong with being wealthy either. However, just because you’re wealthy, doesn’t mean you can “game/corrupt” the system like so many large corporations and some super-wealthy do.
Im giving the comparison that if you’re a non W2 employee the tax system is HEAVILY in your favor. For instance, do you think it’s “fair” that people who make $500k+/year can get a tax refund? I have one client who has done so 4 years and counting. Why? Because of his profession and how the tax system works in his favor. How is that justified??? Is it wrong that he takes advantage of the system? No. But don’t you think the system is just a little bit rigged? It absolutely is!
Also, I know quite a lot of “poor” people…I don’t here any of them complain while a solid 95% of them work 2-3 full time jobs. But how can you justify them paying 30% of their income PLUS sales tax PLUS social security tax PLUS all the other things…while others literally get refunds even when theyre massively profitable!?
In regards to my deductions, that’s just another example. If you like, feel free to ask your accountant if someone in my profession is allowed to do so. Believe me they are. As I mentioned, my accountant is a straight-shooter former IRS auditor. Everything done is completely legal. Yet another example of how its rigged.
In regards to the employer bearing the responsibility, you’re absolutely right. I *DO* believe the business owner SHOULD make more money (especially for their risk). My parents own a business with 15 employees and have been around for over 30 years. Some years they do quite well, other years they are a little in the red.
Keeping with my parents, I suggest you google “30 corporations that spent more lobbying Washington than they paid in income tax”. Ill give you the top 3.
General Electric – Profits $10.46b. Taxes Paid [REFUND of $4.7b]. Lobbying $84 mil.
PG&E – Profit $4.6b. Taxes Paid [REFUND of $1b]. Lobbying $79 mil.
Verizon – Profit $32.5b. Taxes Paid [REFUND $951 mil]. Lobbying $52 mil.
Now I ask. Is that “fair”? The wealthiest – literally the wealthiest – corporations received refunds in years that they made a PROFIT simply because they have high priced attorneys & accountants, off shore tax havens and legally bribe politicians to help re-write the tax code in their favor. Would my parents be “complainers” considering they WOULD be the “bottom 5 beer drinkers” when compared to other companies worldwide? Unless you make a solid $5 million/year, you as well would probably be considered a “bottom 5″ individual.
Are you saying they SHOULDNT make any profit? Of course not. Is making $10.5 BILLION dollars and receiving a REFUND of nearly $5 billion “fair” in *ANY* way shape or form?
C’mon…I don’t care if you’re liberal or conservative or libertarian…that’s just flat out WRONG. It’s called “Crony Capitalism”. It exists. To pretend it doesn’t is like being an ostrich and sticking your head in the ground. I don’t complain and I began childhood as one of those 5 “complainers”. My parents are immigrants and they did as well. We’re doing just fine now – legally. I’m sure you can appreciate the hours and time and effort and *risk* you put into your own business. Are you against the wealthy because they’re wealthy? I’d imagine not.
Is it a whole different topic to be against crony capitalism in both the corporate *AND* individual level? Yes…and *THAT’S* what I’m against, and THAT’S the system we have had in place for quite some time under both Democratic & Republican leadership. [Frankly, they're all sell-outs to whoever lines their pockets].
Thank you for the good writeup. It if truth be told was once a amusement account it.
Glance complicated to more introduced agreeable from you!
However, how can we be in contact?
The pub didn’t pay for your education, healthcare and god knows what else… Rubbish explanation, way too reductionistic.