If Paying For Beer Was Like Paying Taxes...

The Tax System, Explained in Beer! By Johnston Grocke
The Tax System, Explained in Beer! By Johnston Grocke

A complex Tax system made simple, by explaining it in a way that everyone understands! Author Unknown. Video copyright to Johnston Grocke


Most of us just completed our tax returns for 2017 tax year, and I'm sure that we are all relieved that it's over (especially all you accountants out there!). Paying taxes is never a pleasant experience. Who likes sending their money out the door like that? I can assure you that I certainly don't!

As unpleasant as it is to send a fairly substantial portion of my earnings out to Uncle Sam and the Commonwealth of Virginia, it could be worse for me. I could be making a lot more money and have an exorbitantly high tax rate (albeit, now on that's somewhat lower thanks to 2017's tax reform). Or I could live in Australia, with their much higher tax rates.

One financial services company over in Australia made this short video analogizing what buying beer would be like if it were handled the same way that taxes are handled. Just imagine if 10 men go to a bar each week and get a beer. How would the bill be broken down?

The first four, the poorest, would pay nothing, the fifth would pay $1, the sixth $3, the seventh $7, the eighth $12, the ninth $18, and the tenth, the richest, would pay $59.

The question that comes to my mind is how is that kind of breakdown fair? The first four are getting a free ride but are not paying their own way at all. Simply putting the burden on those with higher earnings is unfair because their success is being punished as their earnings increase.

What happens with a tax rate cut? Well, the fifth man now pays nothing, the sixth only pays $2, the seventh $5, the eighth $8, the ninth $14, and the tenth $49. Each of them is better off than before, but if we've learned anything about tax cuts over the past several months, it's that any benefits for those higher in earnings can breed jealously by those at the bottom.

When the richest man has had enough of the envy and hatred being spewed his way, he may choose to go to another place with his money, somewhere more friendly.

This kind of thing is why I think a flat tax rate system would actually be the fairest. If each household paid the same percentage, no matter what they make, that's definitionally equal treatment. The one who's making $20,000 a year, and the one making $20 million a year ought to have a similar rate so that there is not a disincentive for the $20,000 a year person to increase their earnings, and so that the one with $20 million a year can actually keep that which someone has agreed to pay him/her.

One of the biggest problems with a progressive tax rate system is that it actually hurts the poor and middle class the most. In Friedrich von Hayek's 1960 book The Constitution of Liberty, he looked at England's progressive tax rates and found that the majority of the burden fell on the middle class and hurt them the most.

The answer is not to raise taxes on the rich, but to create a tax system where people at the bottom are not burdened with excessive tax rates, but also where those on the up and up are not punished for their success. The best way to do that is with a flat tax rate, in my opinion. Everyone pays a share, and the tax system is not so easily used as a political football.