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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 customer s ? 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
savin gs.
'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 high est 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.
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 customer s ? 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
savin gs.
'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 high est 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.
