Some bar stool economics

A variant of an old tale that’s making the email rounds…

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Suppose that every day, ten men go out for a 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 $1.00.
  • The sixth would pay $3.00.
  • The seventh would pay $7.00.
  • The eighth would pay $12.00.
  • The ninth would pay $18.00.
  • The tenth man (the richest) would pay $59.00.

So that’s what they decided to do.

The men drank in the bar every day and seemed quite happy with 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 $20.00.”

Drinks for the ten men now cost just $80.00!

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 pay their “fair share”?

They calculated that $20.00 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 beer.

That didn’t seem right.

The bar owner suggested that it would be fair to reduce each man’s bill by roughly the same percentage.

Under the bar owners plan:

  • 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 back out of the $20 savings,” declared the sixth man.

He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” shouted the seventh man.  “Why should he get $10 back when I got only $2?  The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison.  “We didn’t get anything at all.  This 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,  somewhere the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.

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

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

* * * * *
BTW: Atlas Shrugged Part 2 opens in theaters October 12th
www.atlasshruggedmovie.com

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One Response to “Some bar stool economics”

  1. Scott Says:

    This analogy is flawed… if you want a more realistic model, not only should a couple people be paying $0 toward the tab, but they would also be getting paid from the top 50% for their seat at the table (think welfare and entitlements)…. but that’s also not to say that the income distribution is fair and that it’s morally unjust for one person to pick up the entire tab (think executive compensation and golden parachuchutes; short-term comp/bonuses for Wall Street traders that assume excessive risks, etc.)… we need more tiers in the tax code; $250k is not the same as $2.5 million; and there’s no moral reason that capital gains should be taxed at a lower rate than ordinary income (emphasis on “moral” and not to say “no economic reason”)… just to say, interest income comes easier to those with existing capital than wages earned by working folks cleaning toilets, building houses, fighting fires, teaching, etc.

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