Bar Stool Economics

[TTiger]

Our Tax System Explained: 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 (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.

[After Shock Media]

Originally Posted by TTiger

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

This will turn into an argument regardless; assuming enough people will read it all.

[MovieMaster]

Sadly people just don't get it! Less govt is good govt!

[Drake]

I read that on thehun yesterday. I'm not qualified to comment on it but I do think it's important because it's central to the future of America.

A good short informative discussion here:

http://rebaneruminations.typepad.com...-bar-stoo.html

What raises the hackles of our left-leaning friends after they finish this little story is that they see nothing wrong with the high earning tenth man being kicked out of the drinking group – in fact, good riddance. You see, they don’t believe the end of the story. Instead, they believe that the nine of them would magically get the missing $59 to distribute among themselves and, therefore, still be able to pay the bar bill.

The socialist believes in a fixed pie, a zero sum game, there is only so much to go around. It never occurs to him that the wealthy guy might have done something to make the pie bigger through his risky investments or starting a company or licensing an important invention or practicing a difficult to learn profession that gave him the high income, and the rest of them the benefits from the high taxes that he pays. These same folks never look at percentages or ratios of tax-to-income, they just look at the dollar amounts and feel cheated. And they always vote for the guy who promises to make things more equitable by making the high earners pay an even greater share of the nation’s tax bill.

And if the national tax receipts don’t quite make up for the cost of all the promised vote-buying programs (or the beer), then the same folks in government just get the added revenues from taxing your assets. They know that you don’t think there is an assets tax, and that you consider inflation as another example of the wealthy corporations just selfishly increasing prices so they can pay more for their CEOs and stock speculators. Beating up on the tenth guy is some of the hope and change promised us come January.

Rebuttal scenario:

DINING ROOM ECONOMICS ...

A group of ten people met outside their favorite restaurant. One was a retired CEO of AIG. He had "earned" 500 million dollars in the last 3 years through hard work and manipulation. One was a wealthy sports star who worked 18 weeks a year and received 20 million dollars a year. One was a small business owner who employed several people and provided desperately needed low wage jobs to the other 7.

"let's have dinner, but we must only eat according to what we can afford.'

The CEO had surf and turf with a nice 500 dollar bottle of wine. the sports figure had a nice steak and a round of shots of some fine sipping whiskey. The small business owner had ravioli and a nice glass of wine. The other seven each had a hamburger and water.

The next night, the ten met again for dinner. But before entering, the CEO brought up a point. "We shouldnt be borrowing money, and the smart people are debt free. So, tomorrow lets all liquidate all of our assets, turn them into cash, and meet again tomorrow." They then proceeded into the restaurant for their usual meals.

The next day, the ten met again Before going in to dinner, they surveyed their various piles of money, both large and small. The CEO then said, 'Nobody should be borrowing from others. And I've been thinking about this glorious war our brilliant president conceived, and I then remembered that it all has been paid for with borrowed money.

"We have all been equally protected from the shia-sunni civil war, and with long term care for tens of thousands of wounded soldiers, we have spent or committed to spend just about one TRILLION dollars. And it all has been borrowed. now, rough math says that 300 million americans owe about 3,000 each. so, here is my 3,000."

The sports star threw his 3,000 in, as did the small business man. The other 7 together had about 3,000 total, so they put that in, and promised to pay their fair share with future earnings.

The next night, the ten showed up, exepet for one. the chicken processor earning $7.50 an hour told the others that his co-worker, Mr. smith died the night before. He had made it to the hospital in time, but was refused treatment because he had no money (It had been tossed into the pot the night before to pay for the glorious war.)

The CEO then spoke up and said, "Well why didn't he have medical insurance. I do, and it covers everything. Sure was nice for me to get free lifetime medical care as part of my golden parachute company. BE PRPARED is my motto."

They then prepared to enter the restaurant. But only three could afford their steaks and drinks. The others spent their entire day's earnings paying back some of the 3,000 they couldn't come up with after liquidating all of their assets. So they went hungry. but that was fair, because the CEO "earned" his 500 MILLION through 5 years of hard work.

The next day, the CEO said to the remaining others, "I just learned that the TOTAL debt of the united states is about 10 TRILLION dollars. That means each of our share is about 30,000. Here is my part." The sports star threw in his 30,000 share. The small business man put in his last bit of capital, then told the other 5 they were out of a job. then the sports star and the CEO went in for a fine, fine, superfine meal and drinks. the others went hungry, but everything was equal per capita in this fine, equal system.

However, this post resonated with me:

The collectivist forever looks at how others are doing relative to themselves, and demands that government enforces various forms of equal outcome. The capitalist is busy trying to invest and produce while being pursued by other capitalists and the mob. It’s a tough game that should and does pay hefty rewards if played successfully. As others and I in this comment thread have pointed out, the collectivist gets an enormous benefit from this because he lacks the temperament, brains, or means to start something himself, and must therefore exist on the economic fringes, begrudgingly selling his labor. Others who celebrate the benefits of such wealth generation understand why people worldwide risk life and limb to get here, or emulate our system in some fashion. The alternative has always proven to be a disaster. Paraphrasing Churchill, ‘Capitalism is the worst way to run an economy, except when compared to any other way.’ I am not a market fundamentalist, and do see the need for government to provide a sparse set of firmly enforced rules for capitalists to play under so that a known, predictable, and trusted environment is created for all who want to play. Not enough rules, and a ‘Blade Runner’ world results. Too many rules and the pie shrinks so that socialist rationing and a poor QoL is the result. Most people of goodwill agree that there is some setting in the middle that provides an acceptable balance between equality and liberty. But to my knowledge, no one has yet found a better compromise than we in the US of A. I may not be able to say that a year from now.

In other words, for all the griping about economic inequalities, America provides the best quality of life and opportunities than any other nation on earth. We can tweak our economic policies, but we must be very cautious not to tip the balance too much.

[Drake]

Here are questions I have about the candidate's plans, specifically Obama's for this first question and general questions. If taxes increase for a large company, won't that company lay people off proportionally to keep their revenue the same as before? Or will this spurn more corporate efficiency and innovation to grow?

Now general questions: Does giving a tax break to the middleclass help them or will the middleclass simply spend that extra money away and continue to increase their individual debt, which is already at record highs? It seems to me that both government and individual citizens have to start reigning in spending. Maybe I'm wrong?

In a globalized economy where there is cheap labor overseas, is a middle-class basically doomed to shrink dramatically no matter what tax policy is implemented domestically? Most manufacturing jobs can be shipped overseas if they haven't already been. Tech jobs can be done overseas too, and even many low level jobs like telemarketing. There are always jobs needed domestically (a handful that are middleclass jobs) - teachers, doctors, lawyers, garbage men, gocery clerks, janitors, bank tellers, and so forth, but isn't the bulk of the middleclass composed of manufacturing job workers?

We know the war in Iraq isn't about eliminating terrorism. For whatever the real reasons are, be it oil and socio-political reasons or other, will America begin benefitting financially from it any time soon?

[kane]

Originally Posted by Mike33

Here are questions I have about the candidate's plans, specifically Obama's for this first question and general questions. If taxes increase for a large company, won't that company lay people off proportionally to keep their revenue the same as before? Or will this spurn more corporate efficiency and innovation to grow?

Now general questions: Does giving a tax break to the middleclass help them or will the middleclass simply spend that extra money away and continue to increase their individual debt, which is already at record highs? It seems to me that both government and individual citizens have to start reigning in spending. Maybe I'm wrong?

In a globalized economy where there is cheap labor overseas, is a middle-class basically doomed to shrink dramatically no matter what tax policy is implemented domestically? Most manufacturing jobs can be shipped overseas if they haven't already been. Tech jobs can be done overseas too, and even many low level jobs like telemarketing. There are always jobs needed domestically (a handful that are middleclass jobs) - teachers, doctors, lawyers, garbage men, gocery clerks, janitors, bank tellers, and so forth, but isn't the bulk of the middleclass composed of manufacturing job workers?

We know the war in Iraq isn't about eliminating terrorism. For whatever the real reasons are, be it oil and socio-political reasons or other, will America begin benefitting financially from it any time soon?

Essentially the middle class will always spend the extra money you give them. That is why they recently had the stimulus checks. They know if they give the average person on extra $600 they will go out and spend it. Consumer spending makes up the bulk of the strength of the US economy. When people stop buying shit they don't really need the economy shrinks and trouble starts to brew. So I think if you want a sure fire infusion of cash into the economy, give the middle class extra money....they will spend it.

As for the middle class, I think they are in transition. The middle class in America was built around manufacturing jobs. These were jobs any high school graduate could get and if they worked at it after 8-10 years they were making a good living and they could afford a house, raise a family and have a nice life. Those jobs are getting shipped out of the country and they are being replaced with lower paying service and retail jobs and some jobs that pay as much or more but are tech jobs or white collar jobs. This means that a lot of these people either have to adapt to having less money or they have to go back to school and learn a new skillset. Neither is a fun option. If you spent 15 years building your life around a $20 an hour job then suddenly you lose it and can only find a job that pays $12-$14 an hour you will struggle and you will go into debt. not to mention when you were making $20 an hour you were probably using credit cards and credit accounts to live like someone making $40 an hour so you already in major debt.

The simple reality is both the rich and companies need the middle class and the middle class needs the rich and the companies. Without the rich and companies there are no jobs for the middle class. Without the middle class buying the things that the rich and companies are selling, there are no rich and companies.

I personally think things are going to get worse for the middle class before they get better. I'm not an economist so I won't even being to assume I know how to fix the problem.

[Drake]

Not that this is relevant to discussing the merits of the original post but for the sake of accuracy it should be known that the original piece was not written by David R. Kamerschen, Ph.D. Professor of Economics University of Georgia.

http://www.snopes.com/business/taxes/howtaxes.asp

[Pete-KT]

That is a good way to explain it