# Bar Stool Economics

Here is the tax system we have – explained with Beer

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, lawyers 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.

I think the other nine only “beat up” the rich guy when he gets all of the \$20. Also, I really doubt anyone would seriously argue that those who don’t pay taxes should receive a tax cut.

The story illustrates an important point in a deceptive way. The rich pay more money in to taxes, but relatively it’s not a greater personal burden on their life, or even necessarily at a higher rate, as Warren Buffet has pointed out.

You had me till the middle.

Poor and middle class people don’t know and don’t care what taxes are like for the rich. They are worried about their own lives, and generally will be happy if taxes go down and grumpy if they go up. Do you really think they sit there doing the math for the high tax brackets? I pay pretty good attention to stuff, I couldn’t tell you much of anything about what percent the upper classes get taxed or how specific tax cuts might affect them.

The reason why “McCain wants to cut taxes for the rich” is a theme is not some sort of resentment based class warfare. Rather, it’s point out the simple fact that when McCain says “I’m cutting taxes by X amount” that probably isn’t going to affect the average voter. Just like the owner of the bar across the street might get resentful at a sign that said “Beer here is ten bucks cheaper!!!” when that isn’t true for the majority of people.

Also, lets point out that this is the best bar in town but it’s going downhill quickly. the beer is getting flat because the tap needs some maintenance and the cushions are all slashed up, and the bar can’t fix it because the owner and the rich guy decided to spend all the beer profits buying guns and hiring thugs to go on some foolhardy adventure robbing some bar on the other side of the world for no discernible benefit except to him and a few of his friends. The creditors are knocking on the door and the whole place looks like it could collapse. But money keeps pouring out in a stream and nobody seems to have any plan to plug the holes. So when the bar owner starts talking about lowering the price of beer, everyone is like, huh? Shouldn’t we stop spending it quite so quickly, and maybe focus on repairing the windows and getting the pinball machine fixed? Of course the rich guy doesn’t care because he drinks his beer in the backroom with the owner, where the velvet couches are doing just fine and they can talk business about all this money being poured into this senseless war…

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

nevermind.

There’s a whole lot of things not showing up in this analogy, including but not limited to:

1. We don’t see the income disparity of the bar-goers.

2. The first four guys DO pay something - just not federal income tax. However, federal income tax is far from being the only tax. The economic activities of everyone are taxed to some extent - property taxes (either direct or through rent), sales tax, gas tax, etc. Since federal income tax is about the most progressive aspect of the tax system, it gets all the play when people complain about how the tax system is too progressive.

3. The beer isn’t divided evenly. Wealthy people derive a lot more value from government spending than poor people. No, they are not direct recipients like those on the welfare rolls are, but their investments make money because the government maintains a healthy economic environment (stop laughing! this is all theoretical!), their businesses function because the government enforce contracts and maintains transportation infrastructure, etc, etc, etc. Or to put it another way, if we go straight to anarchy who loses more - you, or Bill Gates?

4. The tenth guy doesn’t have “not show up” as an option. In the US, he’s already in one of the friendliest tax regimes for people with his income. Most alternatives either have higher taxes, or provide substantially lower living standards. There are a few tax haven island paradises, but his economic activity is still going to be in the US, and be taxed in the US.

Like the part where the tenth guy has the first five guys replaced by two guys fom India on a speaker phone.

I have another analogy. A priest, a hooker, and a sentient fungus from Alpha Centauri walk into a bar…

This piece has also been discussed in two prior threads:

Note that cites in both threads establish that the UGA prof didn’t write it and has nothing to do with it.

Indeed government’s main purpose is to watch our property. Otherwise the poor will just rob the rich blind. The more property you have the more you should pay in taxes so that government will protect it.

A good analogy would be if the rich bar customer decided to pay what everyone else was paying, the bar spends less money on security because of it, and the poor people then steal all his money.

Why don’t the poor people take advantage of that supposed value the government provides, then, and become rich too?

I think you misinterpret his point. A great deal of government activity–yes I am using a weasely phrasing, thank you–is set up to protect people’s interest in their property, like legislation and the court system, contract law, and so on. It’s not a matter of just going and utilizing these services. The point is that to become wealthy one must live in a society where pursuing wealth is practical, where property is more or less respected, and so on and so forth. If you have no property, and little opportunity, how are you supposed to utilize this aspect of government? I mean, suppose the government didn’t do this, that people had to hire private firms to enforce contracts and so on. Are you suggesting that the poor would be paying just as much as the rich to protect their interests? If so, well, I don’t know what to say, but if not, then you have seen the point that was trying to be made.

My analogy is that the standard of living you would achieve were you cast alone into the wilderness is all that you earn with your skills and strength. Everything else is a benefit accrued to you as a result of living in society with the rest of us. Why shouldn’t we expect the ones who derive the most benefit from our society to pay more? If you want to opt out, go ahead.

I think this post by Triskadecamus is the most accurate description of my beliefs that anyone’s ever written (including myself). The key line for me is: “Being a Rich American is a great deal. It should be expensive. The rich should be concentrating on keeping poor Americans well enough off that armed revolution in the streets remains an unpopular option. And they should be happy about it, too.”

Thanks for the response.

Is it fair to assume then, that the bulk of taxes (say, at least 50-75%) go to provide for the common defense, police, fire protection and the courts? That those things comprise the majority of the federal budget?

I would indeed be honored to pay for those things as an American citizen. And would do so gladly.

I’m going to go check the little pie-chart that the IRS sends out each year with the ‘Where your tax dollars go’ slices. It’s probably a waste of time, though. I would expect the biggest slices should add up to those things we just discussed above.

That is what I should expect to see, isn’t it?

What you failed to tell us is that the tenth man wrote it off on his expense account.

You apparently missed the part where the poor are being bribed to not start an armed rebellion. He’s saying that the bulk of your tax dollars is going there.

Note: I would have made a different argument, but I suspect you will profess to be unconvinced that there are very substantial positive externalities in education, medical care, and transportation infrastruture so I won’t bother.

The IRS pie chart will not show indirect benefits that accrue from the result of these expenses, so I don’t know what it can tell you besides what it claims to (which is, just how much is spent). Similarly, poor people do benefit from living in a relatively wealthy society, as well, which would also not necessarily be reflected in that chart.

So, I don’t think the chart will help settle your question. Bill Door’s thought experiment, and mine, might help you settle your question, though.

1. If I interpret your first statement correctly, then taxpayers are basically using the federal government as an armed agent-on-their-behalf to prevent extortion, under the threat of force, from their fellow citizens. Interesting. I’m going to refresh my reading of the Constitution, but my pedestrian understanding was that it was designed to be the other way around.

2. I am very, very convinced of the positive externalities of education, medical care, and infrastructure investments. I have tried to have intelligent discussions in other threads about how to go about those things, but usually get shouted down, or am subject to incoherent ranting and raving, within about 5 minutes of posting. I would be delighted to explore those things with you on this forum.

You could look at it like that. You could also look at it from the perspective of ten workers hauling a sleigh of goods. If the goods reach their destination early or on time, the workers get a big bonus. Unfortunately, any worker can reason thusly: “Everyone wants the bonus, so everyone will be pulling very hard. I can avoid pulling as hard and still get the bonus, which makes me a profit over the other guys. So I won’t pull as hard.” Alas, the sleigh gets there late and no one gets the bonus. Finally, they all agree on a plan of action: use a portion of their expected bonus to hire a person to whip them whenever someone seems to be slacking.

YMMV.

I like Bill Door’s thought experiment a lot. I’m all for it. I would be very happy to engage in voluntary transactions with other members of society, with property rights and contracts enforced by police and courts of law. That sounds like a great idea. And I would be happy to pay for those things with my tax dollars, utilizing a progressive system.

Note that the first wasn’t my statement at all, but just my interpretation of what waterj2 had said. But it’s hardly a novel idea - bread and circuses have a long heritage in government spending.

I have some things to do just now that preclude me from writing a treatise on my philosophy of how government ought to involve itself in various market activities and how those ought to be funded, but I may be able to expand later. But if you agree that there are positive externalities in the mentioned areas, then it follows that absent government involvement the market will under-produce those goods. The rest is just details about how most effectively to subsidize such things, and to what degree. Regardless of how those details play out, my two basic points about the OP (overstatement of the progressiveness of taxation by focusing solely on federal income tax, and glossing over differences in benefits accrued) will both stand. I’m left unsure of what you’re actually trying to say in this thread, and the tenor of your posts which seems to imply you have some sort of laissez-faire gotcha you want to spring isn’t helping me to figure it out.