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BronxLens's avatar

Bar Stool Economics: Does it compute?

Asked by BronxLens (1539points) November 11th, 2008

Supposedly a David R. Kamerschen, Ph.D., Professor of Economics at the University of Georgia wrote this analogy on the redistribution of wealth. I would like to know if his logic/explanation makes mathematical sense or if there are partial or total wrong assumptions on his reasoning.
Here it goes:

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

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.

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10 Answers

gailcalled's avatar

It may compute but it don’t parse. (Reaches for Tylenol.)

BronxLens's avatar

Cant wait for DalePetries response =) ...

dalepetrie's avatar

Doesn’t pass the sniff test. Drinking beers is a luxury, if you want to do it, you pay to do it. A social safety net insures that we all have equal access to the things we need to survive. It’s a flawed analogy first of all. Second of all, what, don’t these nimrods understand percentages?

Why don’t you take that analogy to a department store when they’re having a sale where you get a gift card worth 25% of your entire purchase

Ten guys go into a department store to buy pants

Four can’t afford to buy any pants even at 25% off.
The fifth buys a pair for $10
The sixth buys a pair for $15
The seventh buys a pair for $20
The eight buys a pair for $30
The ninth buys a pair for $40
The tenth buys a pair for $100.

The clerk hands out the gift cards.

The first four guys get no gift card.
The fifth guy gets a gift card for $2.50
The sixth guy gets a gift card for $3.75
The seventh guy gets a gift card for $5.00
The eighth guy gets a gift card for $7.50
The ninth guy gets a gift card for $10.00
The tenth guy gets a gift card for $25.00

Are they all going to complain now that the 10th guy got a much bigger gift card, and then beat him up? No, because the tenth guy spent an assload more money.

Also, our tax structure is not set up so that 40% of people pay no taxes and the top wage earners pay 59%. Our top marginal tax rate is 36%, and that’s on all the money you haven’t found a way to shield from taxes.

Another problem, it looks at one part of the cost. Well, maybe the beer is distributed in this way, but what about the cover charge to get into the bar? What about the food they ordered? This looks at the Federal taxation part, and doesn’t consider that Federal income taxes are progressive, everything else we’re taxed on…not so much.

Here’s the real scoop on taxes. We’ll make a very simple analogy with two taxpayers, call them A and B.

A works 40 hours per week doing a manual labor job. He earns $10,000 a year and gets no health benefits. When he does his federal taxes, he doesn’t have to pay anything.

B works 40 hours per week at an investment bank. He earns $250,000 a year, and has a wide array of benefits. When he pays his taxes, after he shields as much of his income as he can through investments and tax shelters, he pays about $30,000 a year in Federal income taxes.

A and B however don’t lead the same lives (or drink the same beer…much less in the same amounts).

A pays a few hundred dollars a year in property taxes on the hovel he rents in the bad neighborhood.

B pays 10 grand a year on property taxes for his nice lakefront home

A pays a few hundred a year in taxes on the meager things he buys just to get by

B pays a couple thousand a year in taxes on all the nice new electronic toys he doesn’t really need but likes to play with (as well as those things he actually needs)

A pays 50 cents a gallon in taxes for every gallon of gas he buys

B pays 50 cents a gallon in taxes for every gallon of gas he buys

A pays out $3,000 of his income in various taxes, even though he pays no federal income tax. This leaves him with $7,000 a year to live on. He’s one injury or illness away from bankruptcy.

B pays out $60,000 of his income in various taxes, half of that in federal taxes.

A’s overall tax rate is 30%, he works just as hard as B, but lives a much shittier life, and can’t afford to part with that 30%, but has no choice.

B’s overall tax rate is 24%, he has everything he needs and most of the things he wants, and if his federal taxes went up by 6%, he wouldn’t starve to death. A would.

Taxes don’t pay for beer, federal taxes aren’t the only taxes we have, and we NEED a progressive tax structure to a) look out for the well being of our citizens and b) to make things more fair across the board, and not just in the one overly simplistic area you choose to look at.

SoapChef's avatar

Bronx, you forgot the part about the bar owner surreptitiously, slipping number 10 some cash back when no one was looking. He knew 10 would bring his rich friends in to drink.

girlofscience's avatar

Uh, the gigantic thing this overlooks is the fact that 10 doesn’t get more than everyone else also…

As far as taxes go, 10 would have to be getting a ton more beer as well. The “rich” aren’t asked to pay more taxes for getting the same income as the poor. They are already receiving enough money that they can afford to pay a larger percentage of it in taxes.

SoapChef's avatar

The rich pay a smaller percentage of their of their income in taxes. The more money you have, the more ways you have to protect it.

TaoSan's avatar

And of course no one sees that the barkeep would probably be so impressed with rich guy that he would find plenty of deductions that would void his bill entirely, so rich guy would maybe just vouch for him when the bar owners think it’s time to elect a new general manager.

Of course the bar owners would soon raise the price of beer, cause rich guys constant comp-consumption would eventually cause deficits, so in the end, guys number 5,6,7,8, and 9 foot the bill.

It’s nicely written, but a parade example of “selective” facts. And certainly, on his search for another, friendlier bar, rich guy would soon notice that there are only two shotty joints at the other end of town left that actually serve cheaper but “stale” beer.

galileogirl's avatar

Let’s put this on a real basis. Years ago I was the accounting manager at a medium size company and personally prepared the executive payroll. I earned just over $50,000 and paid just over $10,000 in taxes. The VP sales earned $240,000 and ended up paying less than $5,000 in taxes because of his deductions. How was that? He was investing in rental properties and at that time he was able to deduct the interest payments and depreciation from his taxes. The rents were just about a wash with the rental expenses. Also in the 80’s there was doubling up on investments. I remember he talked about an investment in jojoba that gave him a 4 for 1 investment tax credits. That kind of thing was never available to the middle class with our limited disposable income.

If I were paying for the beer, I would have gotten back $2,500 and my friend would have only gotten back $800. However he was still making 5 times what I was and paying half the taxes while building his wealth for future retirement and I had little more than Social Security.

Mizuki's avatar

@galielogirl—keep in mind that Jesus loves the VP more—and that is why he makes more $ and pays less taxes.

galileogirl's avatar

Since most salesmen I know would lie, cheat & steal to close a deal, only Jesus could love them.

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