Our Tax System
Dear Mr. Berko: This is our third request for a copy of your column. Two years ago, our investment club read and discussed what you wrote about 10 families paying taxes at different rates because of income differences. It showed how our tax system favors the wealthy at the expense of the poor. It’s become a hot topic of discussion at club meetings again, but nobody can find a copy to reference. Please, please and please send us that article. — PR, Durham, N.C.
Dear PR: OK, OK and OK! But you obviously have me confused with someone else, because I didn’t write it. And I won’t be drawn into your club’s discussion about the politics of tax inequality. I don’t know who wrote that clever piece, but I remember it well enough to reproduce the crux of its content. Have fun with the following.
For years, every Wednesday afternoon, 10 friends congregated at the local tavern for beer. The weekly bar bill was $100, and the friends agreed to pay the tab as we pay our taxes, so their payments looked like this:
The first four friends (the poorest) paid nothing. The fifth friend paid $1. The sixth paid $3. The seventh paid $7. The eighth paid $12. The ninth paid $18. And the 10th friend (the richest) paid $59.
These 10 friends were quite happy with their bill-sharing custom for a decade, until the bar’s owner threw them a curveball. “Seeing as you fellows are such good customers,” he told them, “I’m going to reduce the cost of your weekly beer by $20.” Now drinks for the 10 friends would cost $80 a week.
The friends still wanted to pay their bill the way we pay our taxes, so the first four friends were not affected. They’d still drink free. But what about the remaining six friends? How could they divide this windfall so that each would get his fair share?
They realized that $20 divided among six people is $3.33 each. But if they subtracted $3.33 from everybody’s share, the fifth and sixth friends would be paid to drink their beers. So they asked their congressman for advice. The congressman suggested that it would be fair to reduce each friend’s tab by a higher percentage the poorer he was, following the tax system they’d been using. Then he proceeded to work out the amount that each should now pay.
The fifth friend, like the first four, now paid nothing. That’s a 100 percent savings. The sixth friend now paid $2 rather than $3, saving 33 percent. The seventh friend now paid $5 instead of $7, saving 28 percent. The eighth now paid $9 instead of $12, saving 25 percent. The ninth friend now paid $14 rather than $18, saving 22 percent. And the 10th friend now paid $49 instead of $59, saving 16 percent.
Six of the friends were now better off than before, while the first four continued to drink free. But after a couple of weeks, the friends began to compare their savings. “I only got $1 out of the $20 that we saved,” declared the sixth friend. He pointed to the 10th friend. “But he got $10.” “That’s true,” exclaimed the fifth man. “That’s unfair. Why should he get 10 times more benefit than I get?” “That’s right,” said the seventh friend. “Why should he get $10 back when I only get $2? The wealthy get all the breaks!”
“Wait a minute!” yelled the first four men in unison. “We got nothing. This new tax system exploits the poor!”
On Tuesday, the nine lowest-earning friends visited the 10th friend at home, called him outside, beat him silly and then went home. On Wednesday afternoon, the 10th friend didn’t show up for beer, so the nine friends sat down and had their beers without him. But when it came time to pay the bar bill, they discovered something: They didn’t have enough money among them to pay for even half their beer tab.
And that, PR, is how our tax system works.