Bar Stool Economics
This was sent to me by my friend and faithful Conclub reader, “Mbucky”.
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 pay $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 EconomicsUniversity of Georgia
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
And then Paris Hilton stumbles in and says “now that you’ve gotten rid of the divends tax, the capital gains tax, and the inheritance tax… I never have to pay for beer again! That’s HOT!”
Oh, and BTW you left payroll and sales taxes out of the mix.
Andre the Defiant
February 13, 2008 at 12:23 am
Of course “I” did nothing of the sort.
Dave the Infidel Sage
February 13, 2008 at 12:25 am
Sorry, HE left them out.
Andre the Defiant
February 13, 2008 at 12:29 am
Since we’re going with a little metaphor tonight…
If the Goverment is a car setting out to give every one a ride to work, then for 40 years the Republicans have been puncturing the tires, pouring sand in the gas tank, stealing the distributer cap, and, whenever they can get their hands on the wheel, driving it straight into the nearest ditch and then, pointing to the wreckage as the tow truck backs up to it, saying, See, this proves that people were meant to walk.
And they do this so that they don’t have to chip in on gas.
Andre the Defiant
February 13, 2008 at 12:39 am
This metaphor is pretty flawed. Instead of a bar, let’s talk about a coffee fund. And say that in the coffee fund, everyone had to put in those amounts. And that the company then decided that since they needed to make cutbacks, they would give people money back from the coffee fund. Not only did the people without much money not really benefit, they also all have less coffee.
Bush recently said that raising taxes on the wealthy doesn’t work because they just find ways to get out of paying them, and that seems like a terrible argument to make. Do we make that argument when it comes to drug smugglers? Drug dealers? Seems like jailing drug dealers doesn’t really stop the drug trade, so why are we fighting it? If rich people don’t want to pay taxes, that strikes me as a YP, not an MP. And instead of just saying “boys will be boys”, why don’t we try maybe enforcing the law.
Wes
February 13, 2008 at 8:08 am
Well, it just so happens that I ran the numbers on what the Bush tax cuts did for my family.
The top 1% of earners pay a whopping 39.37% of all federal income taxes, while the bottom 50% pay 3.07%.
Dana
February 13, 2008 at 8:48 am
I’m a flat tax supporter. The bar charges everyon tthe same and in fact the cost of beer goes down because they don’t need to hire a team of accountants (the IRS) to figure out everyone’s bill. Problem solved.
thompaine
February 13, 2008 at 9:34 am
Mr Paine, that’s not the flat tax, as proposed by Steve Forbes and Dick Armey (a single percentage tax rate), but a tax per person, as the original Constitution envisioned, before the utterly repugnant sixteenth amendment.
Dana
February 13, 2008 at 10:02 am
Dana Looking back I’m not applying this well to this anaolgy as I’m talking about buying the same beer for the same amount which does sort of destroy the whole notion of there being top and bottom earners.
I’d actually like to see zero income tax and a national sales tax but the way things are now I doubt the numbers would add up. A lot needs to be changed before that is possible.
thompaine
February 13, 2008 at 10:52 am
Dana, be so kind as to point me to where the constitution envisioned a flat tax?
pg - your humble messenger
February 13, 2008 at 11:12 am
Let’s take this one step further. Take a look at who benefits most from each tax dollar paid.
Those in the lower 20 percent quintile or so not only effectively don’t pay taxes, they also receive money back from the Federal government in the form of Earned Income Tax Credits and Child Tax Credits.
And think back to 1980, where the upper tax bracket was nearly double to what it is today…the top 1% only paid about 20% of all taxes collected that year.
gurusteve
February 13, 2008 at 11:33 am
Lets not forget that the stimulus package just signed by the President will give additional money back to taxpayers that pay nothing. Free money!
Plugged back into the analogy, the people that don’t pay any of the tab get a free shot to chase down that free beer. And along the way, the Dems will bitch, as Andre and Wes do, that the the poor need to not only be drunk, but downright slobbering shitfaced! All in the name of compassion. After all, the poor in this country need more televisions, cars, cell phones and handouts. What a country!
E the Wise
February 13, 2008 at 12:39 pm
Comment number four was nonsensical.
Metaphors are always fun. A bartender once said that taking out Saddam Hussein for WMD’s was liking pulling him over for pot and him not having any. I then explained that he may not have had any at the moment but his two sons thought he did, he was on the way to get some, had just left the scene of a rape, had a body in the trunk and had a history of setting up meth labs. But let’s be sure to dwell on the fact that he didn’t have any pot in the car.
Carry on gentlemen.
Dave the Infidel Sage
February 13, 2008 at 1:02 pm
Mr Warner asked:
From Article I, Section 2: Representatives and direct taxes shall be apportioned among the several states which may be included within this union, according to their respective numbers, which shall be determined by adding to the whole number of free persons, including those bound to service for a term of years, and excluding Indians not taxed, three fifths of all other Persons.
Congress passed an income tax, but it was declared unconstitutional; that’s why the sixteenth amendment was necessary for Congress to impose taxes on income.
Dana
February 13, 2008 at 1:19 pm
Dana, I understand the 16th amendment and its history quite well, thank you very much.
I was not familiar with a flat tax being referenced in the constitution. I see where you assume that now. I don’t agree you can infer that at all. There is no provision to tax individuals in the document prior to the aforementioned 16th amendment.
pg - your humble messenger
February 13, 2008 at 3:15 pm
After all, the poor in this country need more televisions, cars, cell phones and handouts. What a country!
This is part of why I am for the national sales tax. It more or less crams fiscal responsibility down everyone’s throats. Of course I stick by my previous caveat that a lot has to change before we could realistically switch to such a system. The flat tax seems more pragmatic at least for the time being.
thompaine
February 13, 2008 at 3:51 pm
Hey I know what! Let’s go back to real enlightened self-interest: feudalism! I got my stuff and you got your stuff. We put our stuffs into castles and guard them. Then we go out of our castles and make those people without stuff, the serfs (though some now call them ghetto rats) pay taxes. Yeah that worked real well. Hey, if it worked so well, why did they call it the dark ages?
When asked why he robbed banks, Sutton simply replied, “Because that’s where the money is.”
Come on gentlemen, some of this is just plain silly. Taxes are, and with the way wealth is currently distributed have to be, progressive. Before I get a torrent of Libertarian testosterone I did not say and please read carefully: That there is a moral justification for a progressive tax. I also did not say that wealth should be redistributed either.
The math won’t work any other way with an income tax at current spending levels. Even at a small fraction of the current spending level it does not work. It is also terribly misleading to only say “the wealthiest such a percentage pays such a percentage” and leave it at that. Some context is needed.
None of this is new or a mystery for goodness sakes. A flat tax has its challenges, and that “fair” tax has even more. Dana’s per capita tax is a good, sound Libertarian tax idea. Which means it’s nonsensical (sorry). Let’s divide the federal budget by the number of persons (human & corporate), and have each person pay that share. I am sorry my friend, but that is just not what the Constitution meant, or means today. A “direct tax” is one paid “directly” to the government, as opposed to a sales tax paid to a merchant. It also has meaning in how taxes are apportioned. Did you represent Wesley Snipes?
Argue with what I say if you are so inclined. Please don’t restate principles, or skew what I said, please guys, pretty please. I am a small government, low tax guy. I love John Marshall and agree that “The power to tax is the power to destroy”. I dislike progressive and regressive taxes. I hate taxes period. I am also a realist.
pg - your humble messenger
February 13, 2008 at 4:10 pm
Thompaine, I respectfully ask you to look into a flat tax a little more. There are devils in all these details.
Look, the idea needs to be to work towards a tax system that eliminates as much as possible a politician’s ability to manipulate the system to attain and maintain power.
The ability to reward and punish through taxation, coupled with the motivation to get and stay elected by the politicians, is why we have the system we do. You have to change both, otherwise its futile.
A “fair” tax would have to be around 40% on up to past 100% depending on which “persons” (human or corporate) you chose to eliminate the income tax on.
If you want to help the economy now, and raise revenues, you should lower the corporate tax rate, and the capital gains rate.
pg - your humble messenger
February 13, 2008 at 4:22 pm
Dana said…
Cool! Now tell us how much income each of those groups had? Ah there is the rub. There are good solid arguments about taxes; this is not one of them. People aren’t that stupid.
I sympathize, really I do. This is just the wrong approach.
pg - your humble messenger
February 13, 2008 at 4:35 pm
I want to make it clear that Dana’s “tax per-person” could be considered a direct tax. That does not change what I said about it.
BTW taxes on income from property WERE ruled to be “direct” taxes, so they had to be imposed in proportion to a states’ population. So it was not that property income taxes were an unconstitutional tax, their imposition was. That is what the 16th changed. This seems to be a minor point, but it is important to a discussion regarding “direct” taxes. Anyway, that is my story and I am sticking to it!
No, it is true!
UPDATE: Also Pollock v. Farmers is one of the most inelegant decisions ever written. It did not rule that income taxes were unconstitutional as I said. What it did rule is that they were “direct” taxes, thus triggering proportionment under Article II. In doing this it reversed all preceding law before it. Whether Republicans or Libertarians want to acknowledge it, it was an activist ruling, not constructionist.
pg - your humble messenger
February 13, 2008 at 6:25 pm
Oops – you have problems.
i, See here. Note entry 151-170.
ii, You have ignored the mandatory beer nut payment you are charged when you purchase your drink (i.e. social security, medicare and unemployment insurance taxes).
iii, You have also failed to show how much each person is getting in terms of income in relation to their beers.
Would you care to adjust your story to take these factors into account and give a better perspective?
Phoenician in a time of Romans
February 13, 2008 at 7:53 pm
See, for example, http://www.cbo.gov/ftpdocs/62xx/doc6208/doc18b-Entire.pdf – Table 11. Admittedly, this is out of date, but it does put the beer in relation to the beer nuts.
Phoenician in a time of Romans
February 13, 2008 at 7:57 pm
Some of the most specious arguments the Left have trotted out regarding taxes are that the rich get a bigger “savings” on tax cuts and that the gap between the rich and poor grows without extreme progressivity. The rich will always get bigger savings, and the gap will always grow during economic upswings, because the rich pay the taxes and own a lot of assets and investments. And to flail against that is to flail against reality.
DFV the Scribe
February 13, 2008 at 8:13 pm
Look, the idea needs to be to work towards a tax system that eliminates as much as possible a politician’s ability to manipulate the system to attain and maintain power.
That argument more or less favors a flat tax no? If everyone pays a set rate of X% it virtually eliminates a politician’s ability to manipulate tax laws to suit his/her own ends.
To address this comment….
A “fair” tax would have to be around 40% on up to past 100% depending on which “persons” (human or corporate) you chose to eliminate the income tax on.
Perhaps this wasn’t addressed to me however, if we do go wit a flat tax no one would be eliminated frmo paying income tax everyone would just pay the same rate. Also are those numbers anecdotal? Generally you are very good about backing up comments such as these with a link of some sort. If you are adressing my high minded ideas of eliminating income tax entirely I do agree that much would need to change in order to realistically establish such a system.
thompaine
February 14, 2008 at 10:48 am
Thom, I will try to get you some answers soon. I don’t feel up to it just now. Suffice to say that there is nothing wrong with a flat tax, in fact it is the best among imperfect choices. It is just not a panacea; it also is not as equitable as it seems on first blush. A “fair” tax is a crap-a-doodle idea.
I will flesh out my thoughts more, and give you sources for your perusa and possible edification ASAP.
pg - your humble messenger
February 14, 2008 at 8:13 pm
We have reached some kind of milestone now that my good friend, and global socialist, Phoenician in a time of Romans has commented here. Long Live Kiwi Communists!
I know you to be overly precise and pedantic, so why do you always leave your URLs so untidy?
Anyway cheers and welcome.
Oh, if you were an American Phooey (Thank God you are not!) who would you be voting for? No fair picking a third party. You have to pick from Obama, Hillary or McCain.
pg - your humble messenger
February 14, 2008 at 8:25 pm
Doesn’t ‘Phoenician in a time of Romans’ prowl around Pandagon? I know of her too.
Dave the Infidel Sage
February 14, 2008 at 9:24 pm
Seems we more or less agree PG. “Best among imperfect choices,” is pretty much how I would classify a flat tax as well. I am honestly not sure how my fairly simple notion of a flat tax compares to the proposals of let’s say Steve Forbes. It’s been quite a while since he’s been on the scene.
Sorry to hear you’re not feeling well again. Get well soon and I look forward to your info.
thompaine
February 15, 2008 at 8:56 am
Sorry for the long post, but I wanted to share a variation on this parable that I wrote. I’d welcome any feedback:
At this bar, the ten men actually drink vodka instead of beer. And along with each shot of vodka, the bartender provides a nice tall glass of orange juice. In addition to making the vodka go down easier, the orange juice also provides a vital supply of Vitamin C, without which the men would all develop scurvy, because they live on a small island where produce is limited.
Everybody was happy with this arrangement except the tenth man. He had a masters degree in economics from the University of Georgia, and he saw that there were ways to improve the efficiency of the vodka/orange juice consumption system that he and the other nine men participated in. One day he stayed at the bar after the other men went home so that he could have a word with the bartender.
“Moe,” he began “You know we all love drinking vodka at this bar, but I’m beginning to think that it doesn’t make sense for you to serve us orange juice as well. You see, I’ve done the math and figured out that if you cut out the O.J., you could charge us all $20 less while still making more than enough to cover the cost of the vodka.”
“But where will all of you men get your life-saving Vitamin C?” Moe asked.
“I’ve thought of that too,” replied the tenth man. “There’s a mini-market on the other side of the island that sells better-tasting O.J. for $1.75 a glass.”
“You mean, the mini-market that you own?”
“Sir, I hope that you would not be so gauche as to question my integrity!” The tenth man replied with great indignation.
“Uh, no… I wouldn’t do that,” Moe conceded, “but what’s wrong with the current system? None of the other men have complained about it before.”
“That’s because most of them are just lucky duckies who don’t have to bear the full burden of the oppressive prices you charge for orange juice,” the tenth man answered. “Trust me, I’ve done the math on this, and the entire ten-man group will be better off if you stop serving us the juice. If they trust in the market rather than depending on handouts from your bar, they’ll enjoy higher-quality juice and they’ll feel better about having earned the juice on their own. Think of it another way – if you don’t make this change, I’ll be forced to move to another island where the atmosphere is somewhat friendlier. And then, not only will you lose my business, but you also won’t be able to come over to my house every Friday night to play poker.
Once the tenth man put it that way, Moe finally saw the wisdom of the plan, and so he decided to stop serving juice, even going as far as to chop down his orange trees and sell all of his juice glasses.
The next day when all ten men came to the bar, the other nine were surprised to find that their vodka was served without juice. When they asked the tenth man about the change, he replied:
“I have great news! We no longer have to put up with Moe’s inefficient, poor-quality orange juice. He’s going to charge us $20 less (which we will divide proportionately, as we do with the bill every night), and we’ll be able to buy better juice at the mini-market for $1.75 a glass.”
The seventh, eighth, and ninth man all thought for a moment and agreed that the change made perfect sense, but the other men still were unsatisfied with the answer, and the sixth man spoke up.
“It looks to me like I only save $1.00 on my bar tab, but you save $10.00. Why should I go along with this?
“Class warfare!” Cried the tenth man. “I don’t know what you’re talking about. I’m only saving 16% on my bar tab, while you save 33%, and fifth man over there saves 100%!”
“Yes, but I now have to spend $1.75 at your market to buy our own orange juice, meaning that I’m spending more than I was before. Plus, men number one through four don’t get any benefit from the reduced bar tab. They couldn’t afford to buy juice at your market before, so what makes you think they can afford it now? Is it fair for them to go without orange juice so that you can save money?”
“Well, if they love orange juice so much, maybe they should’ve thought twice before they decided to be lazy and poor,” replied the tenth man. “And while you’re talking about fairness – is it fair that I should spend my hard-earned money for all of you to get crappy orange juice from Moe instead of letting the free market work its magic so that we all benefit from better juice at lower prices?”
“You keep talking about everybody benefiting, but the way I see it, you and men numbers seven through nine all get richer while the rest of us get poorer, and some of us die of scurvy. How can that be good for our ten-man society?”
“There you go with your class warfare again,” answered the tenth man. “This just proves why it makes sense for me to make all of the decisions around here. If you understood economics the way I do, you’d see that we all get an average rebate of $2.00, which is more than enough to cover the cost of orange juice at the market. You see? Everybody wins!”
Nadav
February 22, 2008 at 9:55 am
Let’s say that the ten men DRANK beer in amounts that matched the actual income distribution in the United States.
Let’s say the first four men (the poorest) each drank one 12-ounce beer.
Question: How many tanker trucks of beer would the tenth man (the richest) be drinking?
Steve
June 5, 2008 at 10:58 pm
Does it matter Steve? The reality is that about half of that beer will be taken as taxes. Other portions of that beer are used to create businesses and more beer for others.
E the Wise
June 6, 2008 at 2:17 pm
E the ‘Wise” wrote:
“Does it matter Steve? The reality is that about half of that beer will be taken as taxes. Other portions of that beer are used to create businesses and more beer for others.”
Does “it” [proportionality] matter? You’re asking if proportionality (percentages– weighted averages– perspective) matters? I take your question as your admission of error.
YES, it matters! Proportionality is exactly what is LEFT OUT OF this entire conservative “supply side” voodoo canard. [Canard = An unfounded or false, deliberately misleading story.]
In my experience, at least a simple majority of the American public really don’t understand percentages or the reality behind a weighted average– a weakness supply-siders exploit– to their shame.
I invite you and others to take a graphic tour of the US income distribution here…
http://www.lcurve.org/
Let’s inject some actual facts and numbers into this false debate and see whose heads implode.
Steve
July 12, 2008 at 1:13 pm
Sounds good keep it up
Random guy
July 24, 2008 at 12:03 pm
Steve is correct havent got a clue and my head hurts
Random guy
July 24, 2008 at 12:06 pm
If the wealthy stop playing (or were non-existent in) a part in the system then they would no longer “have in pocket” all of the money we suppose they are “walking away with” when they don’t want to drink with us anymore. That money should remain in the system and go to help the other players to be able to AFFORD their own beer. Not to mention that someone has to make the beer, ship it, deliver it and serve it… and those people’s money is the money that the rich person is so greedily protecting… money that came from system participation.
Me
November 5, 2008 at 7:47 pm
I won’t even call this an analogy or metaphor, because it would need to be similar and correspond with reality he is trying to explain. I get what point he was trying to make, but I think a 5 year old monkey could do a better job explaining it.
The only statement that is true is:
“For those who understand, no explanation is needed.” – Because you believe everything that you read and pass it on to other people. Stop! Think about what you are reading and the point the author is making and check that it is logical. Also, it helps to do some research to verify their statements.
“For those who do not understand, no explanation is possible.” – Because they cannot explain what they were trying to explain, because it is unexplainable and it follows no logic.
Back to the “example.” Why are we trying to explain income tax with a story about consuming a product? That would be better fit for sales tax. If anything, explain it through a service. Ie. The ten guys are throwing a party and need a DJ – how do they split up paying for it (comparing the services that the gov provides to the DJ). But even that could confuse people with sales tax vs income tax.
I am assuming he is trying to use beer as a metaphor for income (income = beer). And Money paid for beer is tax (money = tax).
In which case, the poorest guys only get the beer that is left in the bottom of other, paying customer’s, beer glasses. Basically, they finish it off. The paying people aren’t happy about it, but what are you going to do. That’s why they don’t pay tax. The paying customers also should have various sizes of beer. If beer is income, then the richest guy gets a pimp glass that holds a gallon of beer, and the other guys get various sizes.
There should also be 100 people in the bar, and only 1 rich guy. Those households making >$350,000 account for about 1% of the population. To be more accurate, the rich guy probably has his own keg, or beer truck parked out front. But not all of it. Most of his beer he has stored in overseas cellars and protected from the bartender’s eyes. So they seem less rich than they really are.
There are many other flaws in this example. I would suggest not forwarding it on, or using it in a conversation. I look up the tax code on the IRS website, or google tax explanation. It not hard to understand and much better than his guy.
I would also look up other tax possibilities. I have seen flat tax thrown around and I actually find straight consumption tax interesting. Don’t know if it would actually work, but it seems like it would make more sense. More you consume = more you pay.
DCMB
November 6, 2008 at 12:30 pm