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 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 (2 5%
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
