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Curzon
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Curzon

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January 29th, 2008

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Barstool Economics

Forwarded from Joe:

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 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.

Comments to this entry

Jonny H
January 29, 2008
5:27 am
I was interested enough in this fable to look up this David R. Kamerschen fellow. In his online bio, it reads: "Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics." Additionally, he does NOT know who wrote it." It always pays to do a little checking, especially when you find your information on the internet.
Jonny H
January 29, 2008
5:36 am
And while I agree with the basic idea behind the parable, I think the numbers are a little fishy.
dj
January 29, 2008
6:09 am
Brilliant, Thank you Curzon. Describes it perfectly.

Whenever I hear that the tax cuts "are only for the Rich" I want to throttle someone. They pay a majority of the taxes to begin with!!!

Also with the amount of money they get they are more likely to invest it in start up companies etc. instead of beer and big screens
Curzon
January 29, 2008
6:32 am
Johnny H: I too think the numbers, and even the concept itself, is fishy, and there are plenty of other factors to consider. But it's a fun way to think of things.
SteveW
January 29, 2008
9:13 am
The first four men (the janitors and dishwashers) would get all the left-over, stale beer.
The fifth(the cabbie) would get Bud Lite.
The sixth would get Pabst Blue Ribbon.
The seventh would get Fat Tire.
...
The tenth man (the richest) would get whatever imported, premium, micro-brew beer he wants... And the single-malt scotch, XO Congac, premium Vodka, martinis and all the bar maids of the late shift...

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible, INDEED.
Chief Wiggum
January 29, 2008
3:34 pm
This was posted on the Tigerhawk blog last April 17:

Since your taxes are due today and it is probably too late to evade any taxes you weren't going to dodge anyway, you will be happy to learn that you are among the few and the proud!($)

If the tax forms you're filing this year show Uncle Sam entitled to any income tax, you increasingly stand alone. The income tax system is so bad, and increasingly reliant on a shrinking number of Americans to pay the nation's bills, that 40% of the country's households -- more than 44 million adults -- pay no income taxes at all. Not a penny.

Think of it this way. After dropping off your tax forms at the Post Office, you find 100 people standing on the sidewalk. Forty of them will be excused from paying income taxes thanks to Congress. Twenty of them, the middle class, will pay barely a thing. The 40 people who remain, the upper middle class and the wealthy, will pay nearly all of the income taxes.

Look at that crowd again and find the richest person there. That individual will pay 37% of all the income taxes owed by those 100 people. The 10 richest people in the crowd will pay 71% of the income-tax bill. The 40 most successful people will pay 99% of everyone's income taxes.
jim
January 29, 2008
4:56 pm
As pithy sayings go, I always liked:

If your political platform is robbing Peter to pay Paul, you can always count on Paul's vote.

And the old Reagan classic:

Democracy is three foxes and a chicken voting on what to have for dinner.

...

On a serious note many countries have major problems with market-dominant minorities. The US has always had a market-dominant majority (ie white people), but that seems likely to change over the next 50-100 years. It will still have a market-dominant plurality.

And actually, I believe the avg Asian-American (esp. Indian-American) has a higher income than the avg White. So far there doesn't seem to be much in the way of resentment there. Human nature being what it is, some will probably develop.

I do think the demonization of the white man that's been commonplace in media for the past several decades is harmful to social cohesion. I guess demonizing a powerful group is better than demonizing a minority group, but only marginally. Perhaps we should return to the time-tested tactic of demonizing foreigners! :-) Or, even better and more time-tested, the tribe up-river or in the next valley who pees in our river and steals our best sheep. Those bastards!
jim
January 29, 2008
7:02 pm
My point about market-dominant minorities (re: the barstool econ example): it's a lot easier for the poorer 9 guys to decide to beat up the rich 10th guy and take his money if he's a visible minority. (Jews in Europe, Chinese in SE Asia, Indians in pacific islands, whites in Zimbabwe, etc, etc, etc.)
Alfred Russel Wallace
January 30, 2008
2:51 am
While humorous, the parable lacks the issue that concerns so many of us.... a better similarity to recent tax policy would be '“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20, but borrow $40 from the Chinese that your children, the children of all of you, will have to repay ten years from now...” not nearly such an appealing scenario to me....
Matt Webb
January 30, 2008
12:05 pm
@Steve W

I don't think that is quite right. The barman here is the government and the beer is government expenditure. Therefore the 4 who pay the least (in fact nothing) would get the most beer and the richest man the least. He would have to fork over more cash (beyond the $59) to buy his own premium beer.
Adrian
January 30, 2008
3:43 pm
Bush is trying to justify his tax cuts on their impact on the economy. A tax cut that is designed to stimulate consumer spending should naturally go to the poor, not the wealthy - wealthy people would be more likely to save the money, whereas poor people would be more likely to spend it immediately on essentials.

Jim makes a good point. As the wealth distribution in the US is increasingly skewed, the tax burden will follow suit.

Nobody is going to get any sympathy from me complaining that they pay too much income tax, sorry.
jim
January 30, 2008
7:22 pm
Whether any particular rich or poor person "deserves" to pay higher or lower income taxes is, imo, not a useful question.

People respond to incentives, and changing tax rates changes these incentives. Also different tax schemes can be more or less efficient. For example, most economists agree that the corporate income tax is a harmful tax. The tax just gets passed on to consumers anyway, and the end result is just wasteful since nothing productive is done except effort spent to comply with or avoid the tax.

Other goals, like maximizing long term gdp growth, are more useful metrics for choosing tax schemes. And there is solid evidence higher marginal rates discourage productive activity (and encourage it's untaxed alternative-leisure).

And, to dip into the weeds of class warfare for a moment, the poor benefit much more when their richer, more productive fellow citizens engage in productive activities as opposed to leisure.

I think it helps to be explicit about criteria for evaluating economic proposals. I think intuitive ideas about justice are idiosyncratic and practically useless. For me, long tern gdp per capita growth is the primary criteria. A secondary criteria is equity (ie distributive fairness), so avoiding Latin American style GINI coeffficients seems wise. So I do favor redistribution to a degree. Enough to maintain social order.

The poor will benefit much more from decades of high gdp growth and productivity growth, than they will by a few years of soaking the rich. But the poor, who are uneducated, can not be counted on to understand these arguments or their own long term (decades) self-interest. So bribing them with redistribution is sound policy.

Of course, more ethnically homogenous states can support greater redistribution. There is a much lower limit in a country like America than a country like Sweden.
George
January 31, 2008
7:15 pm
Curzon and Johnny W, the numbers are wrong. According to the US Treasury, in 2003 the top 10% payed 65% of all taxes, not 59%. in other words, the 10th person should actually be paying even _more_ than in the story. [couldn't easily google more recent data, might be different]

It seems like people are reading either too much or too little here. The parable says essentially this: "When poor people don't pay taxes, then tax cuts--any tax cuts--can be described as benefiting the rich." Duh!

The implied message is that politicians who turn tax cuts into a political issue are guilty of misrepresenting what is happening. If they want to complain that government services are decreasing as a result, that's a valid argument. But without discussing the consequences, saying that tax cuts benefit the rich is misleading propaganda.
Sonagi
February 1, 2008
4:16 pm
The problem with the analogy is likening government spending to mugs of beer. Some budget expenses are clearly a waste of money while others are valuable and even necessary. Moreover, while in the analogy, all the men got the same amount of beer, not all residents benefit equally from government spending. The largest expenditures are for health and human services(Medicare), defense (wars and foreign military outposts), and the treasury (including interest on debt). The government does not tax to punish the rich; it taxes to pay for programs that are supposed to benefit the community, state, or nation as a whole. If we are to deal honestly with the issue of taxation, we must look at both sides of the ledger: revenue collection and spending.

Look at that crowd again and find the richest person there. That individual will pay 37% of all the income taxes owed by those 100 people. The 10 richest people in the crowd will pay 71% of the income-tax bill. The 40 most successful people will pay 99% of everyone’s income taxes


Apparently, you define "success" as making money. I would define "success" as doing your job very well, whatever your occupation may be. And keep in mind that those 40 most 'successul' people paying 99% still have assets valued in the billions. That's why Warren Buffet and Bill Gates' dad, among others, opposed a repeal of the estate tax. Even they recognize that progressive taxation is fairest in an economically stratified society. Besides, not all of the superrich earned their wealth. Seven of the top twenty wealthiest Americans inherited their fortunes.
von Kaufman-Turkestansky
February 1, 2008
7:36 pm
Sonagi, your arguments are too subtle! Tax Bad! No government - Good!
Michael
February 1, 2008
10:06 pm
Another question: what if the bartender decided on his own to give these guys the beers SteveW describes above? Walking in and asking for stale leftovers for free is one thing; asking for fresh beer on the assumption that it is paid for and getting stale leftovers at the bartender's fiat. . .

Progressive taxation combined with regressive service is not a good thing if you're trying to avoid spontaneous tavern (or nation) renovation.
Mobius
February 19, 2008
11:42 pm
Curiously, no one has mentioned the relevant Laffer Curve or trickle down encomonics in relation to this parable, however, one very significant benefit of the tab (tax) reduction is that even though the 10th drinker saves $10, he will likely invest that to generate greater TAX REVENUES going to the government, and the parable comes up short on that. The poorest citizens (can't call them taxpayers) benefit from enlarged Federal coffers. If Obama or Hillary are elected, and raise taxes, the paradoxical effect will be to REDUCE TAX REVENUES. How does that help, other than to enlarge government control of the fisc and your life. Sliding toward socialism.
iamme
July 28, 2008
2:40 am
interestingly when the tab (tax) cut is given the tenth man pays an even greater percentage (49/80= 61.25% opposed to 59%). Thus as it appears that everyone doesn't fair as well as the tenth man in the cut, in actuality more burden is placed on the tenth man). The laffer curve is another very relative point to the political commentary on this simplified version of the progressive income tax system (which probably only intended to clarify uneducated complaints about said system). Everyone has been assuming that wealthy and rich refer to extravagant money such as Bill Gates. However the upper middle class which still pays a large percentage of taxes is killed by outdated tax law that requires them to pay a minimum amount rather than calculating their taxes the way the normal middle class would. With the current state of the economy, the better questions than those being posed is what can be done to amend the system. I fear the economy is at a place where over taxation hurts the American public more. (especially the dreaded taxes on corporations which the general public seem to love while not comprehending the problems they cause).
Mick B
September 22, 2008
11:07 am
@Steve W--I don't understand why he thinks the richest man doesn't deserve the premium micro-brew, scotch and late- shift bar maids(but he probably doesn't want them);
Even if his money was inherited somebody actually earned it --i'm tired of trying to understand the whole "the rich don't deserve anything" concept--I went to college (with loans i paid back--my parents did not have the money to send me to college b/c even though they worked hard their jobs did not pay very much), worked 3 jobs during graduate school, secured a great job and work 12 hours a day 6 days a week; I guess Steve just doesn't understand! who will protect my money that i have worked so hard for all these years?
DCX2
October 30, 2008
3:13 pm
@Mike B - Do you like schools, roads, firefighters, police officers, health inspectors, safety inspectors, and so forth? How do you think we have these wonderful things?

Without roads, who would buy products at the mall? Without schools, where would you get educated employees? Do you want to pay the firefighter before he's willing to go into your home and save your wife and children?

Your story of success is great. But taxes will not stop you from living well. You will not become poor paying taxes. But your taxes will go toward making sure that America is still the land of opportunity.

Do you like your big screen TV and surround sound stereo and multi-core computers? Do you think these things will be possible without economies of scale provided by a healthy and vibrant middle class? Would Samsung make TVs if there weren't millions of Americans with disposable income to purchase them?

I'm going to laugh when Obama's tax cuts for the middle class lead to increased revenue for companies from a larger market which more than compensates for the increased taxes.