Bar Stool Economics Simplified Tax System

Best definition and least boring way to explain why the producers are getting the shaft.  One of the things that ended the Roman Empire was the ability of citizens to legally pick pockets of the wealthy at the ballot box.

Best explanation to share with your congressman or congresswoman, who clearly does not seem to understand, this complex principle. 

The United States Tax System Explained:  Bar Stool Economics


Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.00. 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 $1.00.

The sixth would pay $3.00.

The seventh would pay $7.00.

The eight would pay $12.00.

The ninth would pay $18.00.

The tenth man (the richest) would pay $59.00.


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 $20.00."  Drinks for the ten, now cost just $80.00.


The group still wanted to pay their bill the way we pay our taxes, so the First Four Men were un affected. They would still drink for free. But what about The Other Six Men - the paying customers? How could they divide the $20.00 windfall, so that everyone would get his "fair share?" They realized that $20.00 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 pad nothing (100% savings). The Sixth Man now paid $2.00 instead of $3.00 (33% savings). The Seventh Man now paid $5.00 instead of $7.00 (28% savings). The Eighth Man now paid $9.00 instead of $12.00 (25% savings). The Ninth Man now paid $14.00 instead of $18.00 (22% savings). The Tenth Man now paid $49.00 instead of $59.00 (16% savings).


Each of The Six Men were better off than before.  The First Four Men 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 $20.00," declared The Sixth Man. He pointed to The Tenth Man, "but he got $10.00" 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 $10.00 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 Man and beat him up.


The next night The Tenth Man didn't show up for drinks, so The Nine Men sat down and had beers without him. But when it came time to pay the bill, they discovered something very 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 deduction. Tax them to much, attack them for being wealthy and they 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.

Saturday, May 31, 2008