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Bar Stool Economics & How Taxes Work

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Here’s a little story my friend Matt sent me and it’s about economics, taxes, and drinking; only one of which I actually enjoy. I didn’t double check the math but it appears sound and the message is pretty interesting (especially given the talk of the 2008 tax stimulus package!). I invite you to share your thoughts in the comments.

(The origins of this story, as well as some of the story details, are unclear but it’s still an entertaining and thought provoking read)

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. What happens to 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.

{ 42 comments, please add your thoughts now! }

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42 Responses to “Bar Stool Economics & How Taxes Work”

  1. Jim Mowreader says:

    The biggest problem with the Bar Stool Economics story (and its companion the restaurant story) is it pretends The Rich pay more taxes but receive an equal benefit–when in fact the rich receive MORE benefit from the tax dollars they provide.

    If the story was modified to reflect reality, when the bill was $100 the poorest men would get two 7-ounce bottles of Bud and the rich man would receive two six-packs of Sam Adams…at $80 the poorest men would receive one 7-ounce bottle of Bud with a mouse in it and the richest man would receive a whole case of some exotic German beer that’s only sold out the back door of the brewery.

    Conservatives think liberals want the rich to pay higher taxes because the rich don’t deserve to have all that money. Some of them do, I won’t deny that. Most liberals come at it from a different angle: rich people do not get rich without a lot of help from the government. Consider Walmart. They make a LOT of money, but they wouldn’t be able to without a lot of government services–ranging from roads to police protection. We would really appreciate it if the rich would pay their fair share of the burden.

    And John, I’ve got to point out the obvious to you: if the rich man doesn’t have anything for his unemployed drinking partners to do–because he doesn’t have enough demand for his products–he won’t hire them no matter how low his taxes get. OTOH, if demand for the rich man’s products gets so high his staff can’t keep up, he’s going to hire no matter how high taxes are. Demand drives employment, nothing else.

  2. ——————–

    Why do the rich complain about taxes in the first place? They get more for their money! Life, liberty and happiness are promised to all, but the government provides more to the rich. The poor aren’t putting their ski-boats in at ramps built by the Army Corps of Engineers, traveling to Yellowstone, or being saved by the Coast Guard when their yacht springs a leak. The rich have more property, drive more, fly more, get better education, live in healthier environments and get better protection from law-enforcement. The justice system is available to all, but lawyers cost.

    Those who serve in the military, which we are told defends our freedoms, are not the rich. The troops largely come from small towns and urban neighborhoods where there is no place else to go. The freedoms which make America great, which the rich can take advantage of, are protected by the poor.

    ——————–

    All this while the poorer a person is, the larger the portion of their income they give to charity.

    ——————–

    The American Dream is fading away and that will cost our country and our economy more than money. While there are some who go from rags to riches and some who go from riches to rags, the most reliable way of being rich today is to have rich parents. Many European countries now actually have higher levels of change in social class than the does the USA. When people believe that they live in a land of opportunity, they will work and sacrifice to improve themselves and their family. As it becomes harder to break out of poverty, hope leaks out of our country.

    ——————–

    The American economy is designed by the rich, for the rich. Our government, media, culture and even religion are the way they are because they support an economy which helps the rich remain rich. There are exceptions, but not enough to change the system.

    The financial elites are not stupid; the rich will not let things get so bad that we are tempted to revolution, but don’t be fooled by social programs and charity. They exist only to keep the dissatisfaction from turning into chaos.

    ——————–

    Hope for a world where human life has value, greater value than money, is not realistic.

    There is hope for progress and there is work to be done. Perhaps we can modify amoral institutions by appealing to the human people who work in those institutions. Perhaps we can persuade the rich that they will be better off if all of us are better off. Perhaps the standards of religious and ethical thought will change – they have before. Perhaps the masses of people will see their common cause and rise up and demand dignity. I am not optimistic, but I do hope, and I believe in doing the right thing whether there is hope or not.

    ——————–

    So going back to “bar stool economics,” and trying to relate it to the American economy, the rich are buying premium brands and micro-brews and $60 glasses of single malt scotch, but there are more people than ever who can’t afford a Bud-Lite. And the rich aren’t buying it for them.

    This “bar stool economics” story – is a story. Propaganda. It has no relation to reality.

    • Skip Gregory says:

      This is very interesting Dave. Althought you did not stick to the topic, if what I am reading here is a compaint that we are not a socialistic society. Not picking sides, but to arbitrarily state that the poor give more of their money to charities is a broad statement — do you give more that 30% of yours? Remember the Biden / Paul debate? Combined they did not give that much, but candidate did . . . and it was not Obama. How much money does Bill Gates give back to society? Globally? Warren Buffet? Steve Jobs? You might want to do your homework before making bold statements. They rich pay taxes AND also donate to the education and welfare of others beyond taxes. No socialistic country has survived because we are all human and want to be noticed and want to excel. Yes, there is corruption, but that is in everything. Sure, I get jealous that I am not “priviledged,” but I am glad I am in a country and society where I can become so, without being a gangster or crooked politician

  3. Phil says:

    I just have 2 words to bringing the tax code back to a fair and equal thing: FLAT TAX.

    It’s the only fair way for everybody to share the burden.

    • Skip Gregory says:

      I really wish more people would be willing to consider solutions, Phil, like you are. We have to work to get and play together, in order to live together.
      While a flat tax sounds nice, would it work with if you applied it to the beer model? We don’t know their income but less consider basing it on the amount they start with. And do we not tax the poorest? If Obama and Romney currently average about 18% in taxes,would the general population be too thrilled at paying that increase?
      Here again, it might work, but only numbers, polls, elections, and time will tell.
      Thanks, Phil.

  4. Bob Ferguson says:

    To those who understand the meaning and implications of the “Bar stool tax parable”, no explanation is necessary. To those who do not understand, no explanation is sufficient.

  5. Pax says:

    If you take the money from those who are wealthy, and give it to those who are poor, in about 95% of the cases, the following will happen:

    The poor will lose their money, or waste it away, and become poor again.

    The rich will work their way back to becoming wealthy again; without any help.

    There are cases where people have not had opportunity. But not many in this country.

    • Skip Gregory says:

      Thanks for that comment, Pax. I know some will say you are a rich person making it.
      My son argues that he has never received a job offer from the homeless guy on the corner.
      As I suggested to Fish Monger Dave (above) it reveals a side of the wealthy that people like Gates, Buffet, and others often give back huge sums of their wealth (even beyond taxes) to society.
      Sure, when I worked as a short order cook, I was jealous of the rich people who came in to eat and play games . . . but, if they did not do it, I would not have been able to pay my bills. The poor sure were not going to do it.
      Much like the tax situation. If you have millions of government employees (and I am one) drawing salaries and benefits, it is much like a company where management is huge. eventually those who are earning the money cannot supply enough to keep it afloat. Government does not earn money — unless you count the sale of weapons to foreign government an earning. It lives off taxes. Those who are not bringing in NEW money are just like the non-productive portion of a business. But in business you can fire those people.

  6. Carl says:

    I love the analogy and couldn’t agree more. I realize the percentages may not be exact but the basic premise is spot on.
    Personally, I see the main problem with our current issues is the “entilement” mentality. So many people believe they have a right to whatever they want without regard to those around them. This runs from the top to the bottom in our society.It’s truly shameful that we have gotten to this point but history continues to repeat itself and we find we have fallen into the same traps as the many societies before us. Only a fool believes that the government can solve all of the problems we face. Only people have the power to solve problems, not governments, politicians, lobbiest, special interest groups.
    Thanks again for the insightful analogy.


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