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Currently answering: Crepa Anonima (paused)
Matt Dotson, Fascinated by economics
222 votes by Adisa Nicholson, Erik Fair, Marc Bodnick, (more)
So say that your 5 year old can make money by doing things around the house.
$5 for making their bed
$5 for putting away their toys
$5 for putting their dirty clothes in the laundry room
$5 for going to bed on time
They can do any or all of these chores.
Dad is the government.
For the first $5 you earn, dad will take $1 and you keep $4. Dad will give this $1 to grandpa because grandpa used to do a lot of stuff around the house (social security). So if you do one chore, you get $4 and pay $1 in taxes.
For the second $5 you earn dad will take $2 more and you keep $3. Dad will use $1 to buy food for your baby sister (food stamps). And will give $1 to your brother who doesn't do any chores (welfare). If you do two chores you get $7 and pay $3 in taxes.
For the third $5 you earn, dad will take $3 more and you keep $2. Dad will use this money to buy a new crib for your baby sister (infrastructure spending). So, if you do three chores you get to keep $9 and pay $6 in taxes.
For the fourth $5 you earn, dad will take $4 more and you keep $1. Dad will use this money to buy some new locks for the doors (defense spending). So if you do 4 chores, you get to keep $10 and pay $10 in taxes.
You get to make the decision on how much money to make, and how to spend it. Let's say you're a rich person and will do 3-4 chores. Here are your options:
You can decide that all this sounds fair and do all your chores for $10.
You can do some of your chores because it's not worth going to bed on time for just $1.
You can vote for Mom to be the Government at the next family meeting because she promises that if you do 4 chores you'll get to keep $12.
You can give $1 to your aunt (who's an accountant) because she knows a special family rule about children who do all their chores. She says you'll get to keep $13, pay $6 in taxes, and give her $1.
You can give $3 to your uncle (who's a lobbyist) because he can convince your Dad to not tax you for your 3rd and 4th chores. He says you'll get to keep $14, pay $3 in taxes, and give him $3.
Raising taxes on the rich doesn't work as well as we think it will because rich people find ways to not pay the higher taxes.
Hopefully this example teaches about graduated tax rates (how we try to make rich people pay more), how rich people try to avoid paying taxes, and some of the ways the government spends the taxes it collects. Maybe it also teaches about democracy and why Government (Dad) can't make up bad rules or you'll vote for Mom. Maybe it also makes the 5 year old ask why his/her brother gets $1 for doing nothing.
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