Friday, February 22, 2008

Bar Stool Economics

I've been way too busy to even blog lately (never a good thing), but as soon as I can get my head back on straight, I'll be back to it.

In the meantime, I thought I'd share some wisdom I received in email today.

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 everyone'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, 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.

1 comment:

  1. I always love reading that parable. It's simple and very persuasive. Here's a variation on the bar parable that I made up:

    At this bar, the ten men actually drink vodka instead of beer. And along with each shot of vodka, the bartender provides a nice tall glass of orange juice. In addition to making the vodka go down easier, the orange juice also provides a vital supply of Vitamin C, without which the men would all develop scurvy, because they live on a small island where produce is limited.

    Everybody was happy with this arrangement except the tenth man. He had a masters degree in economics from the University of Georgia, and he saw that there were ways to improve the efficiency of the vodka/orange juice consumption system that he and the other nine men participated in. One day he stayed at the bar after the other men went home so that he could have a word with the bartender.

    "Moe," he began "You know we all love drinking vodka at this bar, but I'm beginning to think that it doesn't make sense for you to serve us orange juice as well. You see, I've done the math and figured out that if you cut out the O.J., you could charge us all $20 less while still making more than enough to cover the cost of the vodka."

    "But where will all of you men get your life-saving Vitamin C?" Moe asked.

    "I've thought of that too," replied the tenth man. "There's a mini-market on the other side of the island that sells better-tasting O.J. for $1.75 a glass."

    "You mean, the mini-market that you own?"

    "Sir, I hope that you would not be so gauche as to question my integrity!" The tenth man replied with great indignation.

    "Uh, no... I wouldn't do that," Moe conceded, "but what's wrong with the current system? None of the other men have complained about it before."

    "That's because most of them are just lucky duckies who don't have to bear the full burden of the oppressive prices you charge for orange juice," the tenth man answered. "Trust me, I've done the math on this, and the entire ten-man group will be better off if you stop serving us the juice. If they trust in the market rather than depending on handouts from your bar, they'll enjoy higher-quality juice and they'll feel better about having earned the juice on their own. Think of it another way - if you don't make this change, I'll be forced to move to another island where the atmosphere is somewhat friendlier. And then, not only will you lose my business, but you also won't be able to come over to my house every Friday night to play poker.

    Once the tenth man put it that way, Moe finally saw the wisdom of the plan, and so he decided to stop serving juice, even going as far as to chop down his orange trees and sell all of his juice glasses.

    The next day when all ten men came to the bar, the other nine were surprised to find that their vodka was served without juice. When they asked the tenth man about the change, he replied:

    "I have great news! We no longer have to put up with Moe's inefficient, poor-quality orange juice. He's going to charge us $20 less (which we will divide proportionately, as we do with the bill every night), and we'll be able to buy better juice at the mini-market for $1.75 a glass."

    The seventh, eighth, and ninth man all thought for a moment and agreed that the change made perfect sense, but the other men still were unsatisfied with the answer, and the sixth man spoke up.

    "It looks to me like I only save $1.00 on my bar tab, but you save $10.00. Why should I go along with this?

    "Class warfare!" Cried the tenth man. "I don't know what you're talking about. I'm only saving 16% on my bar tab, while you save 33%, and fifth man over there saves 100%!"

    "Yes, but I now have to spend $1.75 at your market to buy our own orange juice, meaning that I'm spending more than I was before. Plus, men number one through four don't get any benefit from the reduced bar tab. They couldn't afford to buy juice at your market before, so what makes you think they can afford it now? Is it fair for them to go without orange juice so that you can save money?"

    "Well, if they love orange juice so much, maybe they should've thought twice before they decided to be lazy and poor," replied the tenth man. "And while you're talking about fairness - is it fair that I should spend my hard-earned money for all of you to get crappy orange juice from Moe instead of letting the free market work its magic so that we all benefit from better juice at lower prices?"

    "You keep talking about everybody benefiting, but the way I see it, you and men numbers seven through nine all get richer while the rest of us get poorer, and some of us die of scurvy. How can that be good for our ten-man society?"

    "There you go with your class warfare again," answered the tenth man. "This just proves why it makes sense for me to make all of the decisions around here. If you understood economics the way I do, you'd see that we all get an average rebate of $2.00, which is more than enough to cover the cost of orange juice at the market. You see? Everybody wins!"