Barstool Economics
October 5th, 2008 by 
reality
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 paid $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!’
‘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
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
Posted in Government, The Fisc | 
October 7th, 2008 at 2:59 am
Bah! The rich have to live somewhere civilized. Let them pay to stay and if they dont ban them forever. The country would not be in the position it is now if it werent for greedy rich bastards buying politicians.
October 7th, 2008 at 5:19 am
To Fred: better solution would be to ban politicians forever.
October 7th, 2008 at 3:33 pm
The analogy (as most of these lame class warfare from the winning wealthy class analogies are) is completely flawed. They really need to spread this among 100 or 1000 people to see how it is divided up. With only 10, the analogy is too coarse to be accurate. I do not believe that the bottom 40% of taxpayers pay 0 tax either - maybe the bottom 10-15% get money back through earned income credits but 30-40% pay a little unless they have lots of kids and exemptions. It also does not take payroll tax into account which phases out on the rich pretty quickly but never phases out on the middle or lower class. They have distorted the statistics to suit their purpose as the ruling class always does.
I am so sick of people of extreme wealth (and I am in the top 5-10% in earnings myself BTW - which is not as much as you think) bitching about paying taxes. Taxes are historically low by comparison and wealthy people profit exponentially from a stable social fabric and good infrastructure. Just STFU and be happy that you are making enough to have to pay big taxes. Their are far greater inequities in the tax system than the rate itself. Warren Buffett’s secretary pays a higher rate than he does and I pay a higher rate than our beloved president thanks to capital gains treatments.
I call Bullshit on this story. More class warfare from the uber-wealthy shitheads ruining our country.
October 7th, 2008 at 4:03 pm
Actually the bottom 40% (bottom 2 quintiles) pay less than 10% of total tax in aggregate. No, it is not zero but then it was written by an economist.
Stable social fabric and good infrastructure? Get serious. You need to get out more, iTod. Take a walk through Oakland or Richmond, and if you survive you might learn something. Or recall that my son’s new car was stolen within 12 hours of purchase from a decent neighborhood. Health care is crappy to non-existent for most. The infrastructure is crumbling, compared to Europe or Asia the US looks like a third world country.
Then I walk by the collection of firefighters lounging outside the fire station on $200K a year. For the rest of their lives, by the way. That makes me pretty angry. That happens because the non-payers coerce the payers.
Certainly it irritates me that the very rich, like Buffett and the hedge fund managers, pay essentially no taxes. Political corruption irritates me too. But there needs to be accountability for the voting. If you vote for higher taxes, at least some of it should come from your own pocketbook proportionally.
October 7th, 2008 at 4:33 pm
I am also disappointed by crime and the state of healthcare and our infrastructure but you can blame that more on the fact that we live in a predator state where the existing funding is diverted into the pockets of the oligarchs. There is plenty of tax money to fix the infrastructure and healthcare and SS and Medicare. However, fighting two wars and maintaining a global military effort is too expensive for us. There is tremendous money siphoned off in defense and homeland security. The servicing of the debt. burden is also going to become a huge problem if we don’t start paying it down more and spending less. 30+ years of supply side economic voodoo nonsense are going to reduce our standard of living substantially over the coming years. No doubt.
However, you need to get a grip. I have lived in the bay area and other places and I have traveled extensively throughout the world. Spend a week outside of a major city in Spain. Spain is a 3rd world country outside the cities. Many places have no running water or electric. Try Cambodia, Thailand, China, Mexico, etc. We may not be Europe and there are devastated inner cities in the USA but we still have a lot that does work. Potable water is a huge problem in much of the world and you can pretty much drink from a tap anywhere in the US and not worry about getting really sick or dying. Electric and Telephone still work most everywhere (barely granted).
I am all for every person earning wages paying at least some nominal tax and not getting money back (otherwise Tax like SS just becomes a method of wealth redistribution) however once you throw in payroll taxes it becomes fairer.
IMHO, the REAL problem is the high level of overall taxes when you add in all of the stealth taxes like sales tax, gas tax, state income tax, property tax, payroll tax, mortgage xfer taxes, doc stamps, permit fees, etc.
We have a devious system where they think by using lots of different taxes they can fool us into thinking we are not heavily taxed. I work with Canadians and if you live in NY or CA, you essentially pay the same as they do and get a lot less for your money. A good example is the unbelievable but true statistics showing that something like 46% of all GDP goes to state, local and federal govts. from all these taxes and fees. Essentially half of everything produced is sucked up by the various public authorities who are the most inefficient users of capital. This is too much and is destroying the economy. It was 20-22% until the 50s and just exploded since then.
October 7th, 2008 at 5:38 pm
Frankly, I think I have a pretty good grip on what other countries get in services in relation to what they pay. And it is a lot more.