Our Tax System Explained: 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 p ay. 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 got’ ‘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, ladies and gentlemen, 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.
Except during the dinner the first 8 people had to split one beer and the two guys at the end of the table had 9 (beers equaling 16 ounces). Plus the bottom eight had to clean up afterwards.
Complete vitae available online. Contrary to Internet folklore, Dr. Kamerschen is NOT the author of “Tax Cuts: A Simple Lesson in Economics” or “Bar Stool Economics” or anything similar to that. Additionally, he does NOT know who wrote it and he has no opinion on its merits. http://davidk.myweb.uga.edu/
The bartender realized he was in a fix. He had discounted the beer for his best customers but now he was at risk of not only losing this tab, but also losing his best customers to bar room bankruptcy. The bartender thought about how this kind of problem gets solved by serious finance professionals and decided that he needed a bar room bailout. The bartender settled on the following plan: a) He would let the men continue drinking at the bar, because this was good for business. Watching 9 dejected men walk out of his bar might scare away other customers. b) He would lend the men $80 though he had no idea whether that would be enough, with the promise that they would pay him $90 at the end of the evening. c) He made them promise that they would raise the $90 by selling their valuable personal assets, like their clothes, presumably to other people in the bar. d) He raised the price of drinks for all the other bar patrons, just in case he had a loss. Since the bar had lost money during the Bush Administration, this didn’t seem like such a bad idea anyway. e) He decided that he would buy some wooden arrows for his children. He wasn’t sure why he would do this, but he knew there was some connection between bailouts and wooden arrows that he had heard about on CNBC. So the men spent the $80 on more drinks while planning to sell their belongings. While drinking shots of liquor that they previously could not have afforded, they took inventory of their personal affects and came up with a balance sheet. Their clothes were worth at least $120 though they had not tried to sell any yet. They presented the balance sheet to the bartender, who reasoned that he could now lend them another $30 and pick up another $5 in interest at the end of the evening. The bartender had a pretty good thing going here, so he called up his bartender buddies at the British pub and the German Bierhaus who were having similar problems and told them. “Sounds pretty good”, they all agreed. So the men used their $30 to drink even more, getting pretty drunk. Then they set about selling their clothes as it was about closing time when the bill was due. The other customers had little money left as the drinks seemed especially expensive and were unsympathetic to these men. It was clear that they had had a better time in the bar than any of the other patrons. Besides, the men were out of time and credit and had little bargaining power. They ended up selling all their clothing, watches, and even their eyeglasses for $60. The men gave the bartender the $60. The dismayed bartender sat down to calculate his losses. He was still down on the original tab and now he was down another $50 plus all the interest he thought he was due. He had made some money on the more expensive drinks, but somehow he had sold many fewer drinks to his other patrons. He was probably down on his profits from them. His bar was filled with drunk, naked guys arguing about who screwed up the most in over-valuing their clothing. All his other patrons had left. Someone had puked on the bar. He had no money to buy those wooden arrows for his children. His only consolation was that he had just seen a chair fly through the front window of the German Bierhaus so maybe the competition was getting hurt more than him.
^priceless i await the next installment where the world powers that be decide that bars are just too big to fail and bail everyone out. i mean, everyone wants to see the bar made of pure ice in reykjavik still serve vodka to CLOTHED people, right? it’d get cold otherwise and it’s already dark, so the story wouldn’t have a happy ending. that’d be tragic. i might start investing there at 18% just to get the next chapter of this story. tell me it has a happy ending! maybe even you can write a choose your own adventure book where you get choice A of some socialist republic where everyone can consume only 2 beers now and nobody gets more than the next guy… OR… the “maverick” ending. mavericky. palinized. drill baby drill. as long as joe the plumber can drink, it’ll all be ok.