Sunday, November 2, 2008

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 sti ll 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 restaura nt 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 ta x 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.

3 comments:

miscellanea said...

FWIW, Dr Kameschen did not write this piece: http://davidk.myweb.uga.edu/ & http://www.snopes.com/business/taxes/howtaxes.asp

Overall, I wish our tax system was in fact this simple, but it's just not the case. The example exaggerates the burden on the rich while ignoring the other factors in their favor (eg, investments being untaxed or taxed at lower rates, tax loopholes for businesses, etc) and generally assumes all people are getting the same deal (eg, a mug of beer) for their contribution. I don't know the ideal solution, but feel that a system that allows Warren Buffet to be taxed at a lower rate than his secretary or cleaner ( http://www.timesonline.co.uk/tol/money/tax/article1996735.ece ) is admittedly broken.

Gina - RoseThistleArtworks said...

Thank you miscellanea for posting your thoughts here. I appreciate your taking the time to share them.

I try to document and attribute quotes or stories from others where-ever possible. I have to apologize that it appears this is not a quote as it was presented to me. I have removed the name this quote was attributed to based on the statement on David Kamerschen, Ph.D.'s website.

Although, http://davidk.myweb.uga.edu says David Kamerschen, Ph.D. may not have written this piece, his site says, "he has no opinion on its merits". It seems to me to be clear that he is very aware of what this article says and if he disagreed with the point being made, he would have made that clear in his statement.

I feel the logic stands, regardless of the original author. We just disagree on the point being made. That's okay by me. I can agree to disagree and still appreciate a thoughtful response.

I, also appreciate that you left another source of documentation for your thoughts on authorship.

However, I would like to point out that snopes.com is really Barbara and David Mikkelson, a married couple who take complete responsibility for their site and info presented. They also explain how they may mark things false that are actually true on their FAQ page. http://www.snopes.com/info/faq.asp

It's my opinion, they may be a source to consider or to start further research of documentation they provide. But, the common thought that they are the be all end all of true vs. false is disputed by their own statements. Their statements are no more valid than anyone else who does some research.

This next part is not directed to you miscellanea since we have never discussed this topic. I do not know where you stand on the perceived validity of truth in the Bible.

I just want to point out my general thoughts on something I've noticed about snopes.com

I think it's ironic that many people who doubt the truth in the Bible because, regardless that the author is God, it was "written by people and subject to human error", will take David and Barbara as the ultimate yea or nay of truth, which is a claim that even they dispute. They also admit that a statement may be true, yet marked false by them for various reasons. This is also on their FAQ page.

Again, this is not aimed at you miscellanea since we've never discussed the Bible and unlike most times I've seen snopes as a documentation, you provided another source for the authorship. I appreciate that kind of research.

Thanks again for leaving your thoughts! Good debate.

Terra Hangen said...

Illuminating story.
I saw your funkyfelter icon and clicked on it, lots of pretty stuff there.