Bar Stool Economics - Critique

You may have seen this before. It deserves to be looked at and evaluated.

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 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 $50 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 education. 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.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible.

Attributed to a variety of people, but according to Snopes, there's no clear evidence for the authorship of this story. The earliest reference they can find to it was in the letters column of the Chicago Tribune 2001/03/04 - submitted by a Don Dodson. Mr. Dodson might be the originator, but we don’t know.

A coworker sent this along to me. I would have ignored it, but he sent it to some of my other coworkers too, so I wrote up a response and hit “reply-all.” After some cleanup and additions here’s my take on “Bar Stool Economics.”

Some see a bigger picture.

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Some also know that there is a cover charge to get into the bar. FICA and Medicare are paid at the same rate by the rich and the poor. (Actually, FICA/Social Security taxes are paid at a lower rate by those with incomes over $97,500.) Loopholes in the tax code benefit the wealthy and the poor pay a higher percentage of their income in state and local taxes.

The rich man above pays 59% of the bar bill. In the USA today the highest income tax bracket is 35%, among the lowest in the world. In the 1950s, the highest tax bracket was 92%. That high rate did not seem to hold this country back during the greatest peacetime growth of the 20th century.

Loopholes are available to all, but we don’t even see the inequality unless we look at the big picture. For example, we can deduct mortgage interest on our home and we don't have to pay capital gains when home appreciates in value. This is promoted as a way to promote home ownership, but the rich, who will have their own home anyway, can use it on an opulent mansion the same as the poor in a small home. And renters don’t benefit at all. Another way very-high income Americans (the richest 1% who have more wealth than 90% of the rest of us) avoid taxes, is to keep much of their money in offshore banks in Switzerland or the Camin Islands.

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The average (mean) income for Americans has risen since the depression, but since the 1980s, the median income has become stagnant and begun to fall. That means the rich are getting richer, but, the poor and middle class are getting poorer. Also remember that family incomes now come from two-earner households instead of from a single breadwinner.

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Why do the rich complain about taxes in the first place? They get more for their money! Life, liberty and happiness are promised to all, but the government provides more to the rich. The poor aren’t putting their ski-boats in at ramps built by the Army Corps of Engineers, traveling to Yellowstone, or being saved by the Coast Guard when their yacht springs a leak. The rich have more property, drive more, fly more, get better education, live in healthier environments and get better protection from law-enforcement. The justice system is available to all, but lawyers cost.

Those who serve in the military, which we are told defends our freedoms, are not the rich. The troops largely come from small towns and urban neighborhoods where there is no place else to go. The freedoms which make America great, which the rich can take advantage of, are protected by the poor.

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All this while the poorer a person is, the larger the portion of their income they give to charity.

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The American Dream is fading away and that will cost our country and our economy more than money. While there are some who go from rags to riches and some who go from riches to rags, the most reliable way of being rich today is to have rich parents. Many European countries now actually have higher levels of change in social class than the does the USA. When people believe that they live in a land of opportunity, they will work and sacrifice to improve themselves and their family. As it becomes harder to break out of poverty, hope leaks out of our country.

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The American economy is designed by the rich, for the rich. Our government, media, culture and even religion are the way they are because they support an economy which helps the rich remain rich. There are exceptions, but not enough to change the system.

The financial elites are not stupid; the rich will not let things get so bad that we are tempted to revolution, but don’t be fooled by social programs and charity. They exist only to keep the dissatisfaction from turning into chaos.

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Hope for a world where human life has value, greater value than money, is not realistic.

There is hope for progress and there is work to be done. Perhaps we can modify amoral institutions by appealing to the human people who work in those institutions. Perhaps we can persuade the rich that they will be better off if all of us are better off. Perhaps the standards of religious and ethical thought will change - they have before. Perhaps the masses of people will see their common cause and rise up and demand dignity. I am not optimistic, but I do hope, and I believe in doing the right thing whether there is hope or not.

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So going back to “bar stool economics,” and trying to relate it to the American economy, the rich are buying premium brands and micro-brews and $60 glasses of single malt scotch, but there are more people than ever who can't afford a Bud-Lite. And the rich aren't buying it for them.

This “bar stool economics” story - is a story. Propaganda. It has no relation to reality.