The US Tax System Explained in Simple Terms

by ElisabethDonati on February 24, 2012

Most people in the United States don’t understand how our tax system works. The following story, written by David R. Kamerschen Ph.D. Professor of Economics originally was written about men and beer so I crafted a kid-friendly version for you. This should be taught in every economics class in the world!

How Our Tax System Works

US Tax System Explained

THE TAX SYSTEM EXPLAINED IN BURGERS AND FRIES

Suppose that every day, ten kids go out for burgers and fries 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 kids (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 kid (the richest) would pay $59

So, that’s what they decided to do.

The ten kids ate in the same burger joint 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 meal by $20″. Food for the ten kids would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four kids were unaffected. They would still eat for free. But what about the other six kids? How could they divide the $20 windfall so that everyone would get a fair share?

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth kid and the sixth kid would each end up being paid to eat their meals.

So, the restaurant owner suggested that it would be fair to reduce each kid’s bill by a higher percentage the poorer he/she was, to allow 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 kid, 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 other five was better off than before. But, once outside the restaurant, the kids began to compare their savings.  “I only got a dollar out of the $20 savings” declared the sixth kid.

He pointed to the tenth kid, “but she got $10!”  “Yeah, that’s right,” exclaimed the fifth kid. “I only saved a dollar too. It’s unfair that she got ten times more benefit than I did!”  “That’s true!” shouted the seventh kid. “Why should she get $10 back, when I got only $2? The wealthy get all the breaks!”  “Wait a minute,” yelled the first four kids in unison, “we didn’t get anything at all. This new tax system exploits the poor!”  The nine kids surrounded the tenth and taunted her until she couldn’t take it anymore.

The next night the tenth kid didn’t show up for her meal so the nine sat down and had their burgers and fries without her. 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, anchor people and elected officials, 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.

As always, just something to think about…

PS Thank you, David.

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