Read the Bills Act Coalition

Tuesday, July 7, 2009

Bar Stool Economics

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. '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 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 - the paying customers? How could
they divide the $20 windfall so that everyone would get his 'fair
share?' They realized that $20 divided by six is $3.33. But if they
subtracted that from everybody's share, then the fifth man and
the sixth man would each end up being paid to drink his beer. So,
the bar owner suggested that it would be fair to reduce each man's
bill by roughly the same amount, and he proceeded to work out the
amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now paid $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four
continued to drink for free. But once outside the restaurant, the
men began to compare their savings.

'I only got a dollar out of the $20,'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 than I!'

'That's true!!' shouted the seventh man. 'Why should he get $10 back
when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get
anything at all. The 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 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 college professors, is how
our tax system works. The people who pay the highest taxes 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.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible

6 comments:

Anonymous said...

Great illustration of the dangers of excessive taxation, envy and ultimately how beneficial higher earners are to everybody.

However as a note this is not by David R. Kamerschen, as stated by his own homepage:

http://davidk.myweb.uga.edu/

Anonymous said...

It's a simple point but apparently completely missed. When taxes are cut, those who pay the most get the benefit of a larger amount of money, but a lesser % amount returned. If you don't pay it's hard to reduce the amount. The services rendered are the same for the person who pays or isn't required to pay. And when the money leaves, everyone loses.

There is an underlying perception that the rich guy was evil in some way just because he had money. But there is no indication of anyone being good or bad, just envious. And that is the point. The responses just indicate how effective the politics of envy have been. Being rich or poor never before was associated with being good, bad, happy or sad. Today it is. Being poor is associated with being lazy and unhappy, being rich is associated with being greedy and selfish. Life and people are not that simple.

The lesson is that ingratitude leads to actions and attitudes that become self destructive. Unfortunately this is the motivation for much of today's politics.

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bar stools said...

Thanks for this explanation about excessive taxation and how it is actually good for the little guys. It's an accurate thing, but i really do think you have over-simplified it!

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