Bar Stool Economics

I got this story in a chain email today. I don’t usually give much thought to these types of messages, but this one is pretty good.

With everyone speculating about the economy these days, everyone seems to have a different idea on how to fix it. The problem is, these ‘armchair economists’ don’t seem to understand how the economy really works. Don’t get me wrong, I certainly don’t understand how it works. I’ve even heard people with graduate degrees in economics say that they don’t understand how it works enough to confidently suggest solutions to the issues we are facing.

My speculation on this speculation (meta-speculation, if you will) is that no one understands the entire system. Most people don’t understand even one part of the system in any depth. Some people do understand certain parts of the system. There exists someone who understands, in depth, each part of the system. But no one person understands every part of the system.

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In any case, I try not to fret too much about things I don’t understand. I just go to work and do my job, and try to live within my means. If we all do that, I’m confident things will improve. But maybe I’m just naive.

In any case, this essay attempts to put the tax structure into terms we can all understand. This is a gross oversimplification, I’m sure, but it still helps laymen to get the big picture, at least.

In the email I received, it is attributed to Dr. David R. Kamerschen, from the University of Georgia. However, on his homepage, he disavows authoring this essay. Here is a further discussion of the origin of this essay.

Here is the essay, as I read it:

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.

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 paid $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