Bar Stool Economics, something to which we ALL can relate! Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. They could all just pay $10 since they all drank beer or if they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest of the 10) 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 OK with the arrangement until one day, the owner threw them a curve. 'Since you are all such good and faithful customers,' he said, 'I'm going to reduce the cost of your daily beer bill 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 realised if they divided the $20 savings by six they could each reduce the amount they were paying by $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 the same way Tax Savings are dispersed, 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)
- so 5 men are drinking for free. The sixth now paid only $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 (the wealthiest) 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, now along with the 5th too. But once outside the restaurant, the men began to compare their total dollar 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. '$20 was given back and we didn't get anything at all. This 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.
(received by email)
