OT: About “Bar Stool Economics”

March 6, 2010 · Posted in Uncategorized

Here’s a popular chain mail that’s been making the rounds for about a decade now. If you recognize it, jump ahead for the real good stuff.

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 on 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!”

“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.

First off, a quick lookup at Snopes reveals that the article attribution is false.

Second, I am suspicious in general of simplistic internet memes and this one in particular seemed to be quite loaded with its agenda. Not being an economist, I browsed around for reasonable criticism. And found this gem:

Gosh oh gee. How do I debate such a straight forward and simple explanation of our tax system?

Let me try.

A “real” economist would have two problems with this “example”:

1. It uses luxury as its model. A simple understanding of game theory shows that at the end of the story, if the 10th man decides not to buy, then he has no leverage. No one “needs” beer. Our government doesn’t apportion luxuries.

2. There is no baseline. The assumption is that if you can’t afford it, don’t drink. When in reality, what most of us are doing is working to pay for food, clothing, shelter, education, and healthcare. THAT is the baseline. Anything made above the price of these necessities could be subject to the “beer” argument, but the result would end up with pretty much everyone paying as shown.

So it’s ridiculous to use beer as the example. Why not use 60″ plasma TVs or diamonds? None of these represent the economic situation that most of us find ourselves in. Since the example uses a luxury (beer) as its foundation, let’s rewrite the story using a necessity: Oxygen.

HERE IS THE UPDATE TO THE STORY

Suppose that every day, ten men go out for oxygen and the bill for all ten comes to $100. 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 breathe each day and seem quite happy with the arrangement, until one day, the richest man throws them a curve.

“I’m tired of paying the most when you all use the same amount of oxygen. I’m not going to pay for you to get oxygen anymore. Go buy your own air.”

the 1st and 2nd men (poorest) can’t afford oxygen and die within minutes.

The 3rd poor man gets his wages reduced by his boss (the seventh man who needs to pay more now) and can no longer afford oxygen either. He dies within days.

The 4th poor man, pays for oxygen and continues to breathe. How? He loves his wife and kids and so to continue to allow them to breathe, he was driven to steal the rich man’s car to pay for oxygen for his family. Crime increases, not because men want “beer” and bling, but because they will do anything to provide for their families. He gets caught and sent to prison where he earns no money. His disabled wife and small children all die now that they have no provider of oxygen.

The 5th & 6th men make their living selling products (like food) and services to the first 4 men. Having more than half of their customers die, they can no longer afford to stay in business. They both close shop and die within weeks.

The 7th & 8th men own or work for companies that sell products and services to the 9th & 10th man. Unfortunately, the workers they rely on to plant and harvest the crops, manufacture goods, and deliver the services have all died. Within months, the 7th and 8th men die.

The 9th man has enough money to buy oxygen for a year. Unfortunately, the guy that refills oxygen bottles was man number 1. The guy that maintains the regulators and oxygen safety equipment was man number 2. The owner of the trucking company that delivers the oxygen was man number 7. Man number 9 dies in 4 months when the supply of safe, available oxygen disappears.

Now we come to good, ol’ man number 10. The guy that wants to stop paying because he is blind to the value others bring to him and his lifestyle.

Man number 10 has stocked away 5 years worth of oxygen. He’ll survive…at least for awhile. As long as he can build his own roads, make his own electricity, maintain his own equipment, grow his own food, provide his own healthcare, clean his own air & water, and protect himself from fire, flood, hurricane, and the occasional attack from anyone else who might have survived and wants to take HIS oxygen.

And that, ladies and gentlemen, journalists and college professors, is how our tax system would work if we let the short-sighted run our economy. The people who pay the highest taxes need to understand that they truly get the most benefit when the people who supply, buy, and work for them can afford the necessities of life.

Bitch too much, attack the middle class and poor for not paying enough, and they just may stop producing, showing up, or DIE.

David Stuck

Student of Life and Economics

For those who were naive enough to accept the “beer” analogy, think about where YOUR money goes and what would happen to you. (hint: You aren’t the 10th man)

http://davestuck.blogspot.com/2008/10/for-over-year-now-bar-stool-economics.html