Bar Stool Economics - A Tax Story

[Tony356993]

Bar Stool Economics
Here is one that a friend of mine emailed me and I thought that it would be great to share it.

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 on 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 Economics
University of Georgia

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

[catchacab]

1

[Wellardmac]

A nice illustration that most sadly do not understand.

[Phokaioglaukos]

The Bush tax cuts are worth, on average, about a thousand dollars a week for those of us with incomes in the top one percent; for the bottom fifth, about a dollar and a half. (New Yorker, 10/13/2008, p. 54)

In my book that is just plain unfair. Might someone in the top one percent take his ball and move to a tax haven if we allow the Bush tax cuts to expire? Maybe, but (a) it's not as easy to move emigrate to another country as it is to drink at another bar and (b) should we let that get in the way of fairness?

 

[cjbcpa]

A true enough tale. Sadly, the focus on income taxes diverts attention from what, in my opinion, is the real  issue. The overall tax burden.

Emphasizing the amount of income taxes one group pays over another only diverts the electorates attention and stirs up the "us vs. them" mentality that makes it impossible for there to be any meaningful tax reform or political change period. Income taxes are only a small portion of the taxes we all pay (but a very visible one.)

For once I would like someone to add it up for the "middle class"; income taxes, FICA tax, Medicare tax, state income tax, local income tax, per capita tax, property taxes, fuel taxes, sales tax, taxes and fees on phone bills and utilities. Then the middle and lower middle class could really see how the same politicians pandering to their sense of "fairness" on income taxes are really screwing them (and all of us) with the taxes no one talks about.

To me, positive tax change means changing the system to operate solely to fund what the government needs to function, not some mechanism for social engineering. Scrap the taxes on income and convert them to taxes on spending. Reward people for working hard and being successful. Let them keep what they reap and invest. Tax spending.

What's the real cost of those $10 beers when its all said and done, I'll venture under our current system that each person had to earn $15-$20 to pay for it.

[George3]

Since this is "Off Topic" . . . I'd like to get the Off Topic King's read on this . . . .