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Our Tax System Explained: Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all tencomes to \$100. If they paid their bill the way we pay our taxes, itwould 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 thearrangement, until one day, the owner threw them a curve. ‘Since you areall such good customers,’ he said, ‘I’m going to reduce the cost of yourdaily 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 thefirst four men were unaffected. They would still drink for free.But what about the other six men – the paying customers? How could theydivide the \$20 windfall so that everyone would get his ‘fair share?’They realized that \$20 divided by six is \$3.33. But if they subtractedthat from everybody’s share, then the fifth man and the sixth man wouldeach end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’sbill by roughly the same amount, and he proceeded to work out theamounts 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 continuedto drink for free. But once outside the restaurant, the men began tocompare their savings.

‘I only got a dollar out of the \$20,’declared the sixth man. He pointedto 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 got’ ‘That’s true!!’shouted the seventh man. ‘Why should he get \$10 back when I got onlytwo? The wealthy get all the breaks!”Wait a minute,’ yelled the first four men in unison. ‘We didn’t getanything 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 satdown and had beers without him. But when it came time to pay the bill,they discovered something important. They didn’t have enough moneybetween all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, ishow our tax system works. The people who pay the highest taxes get themost benefit from a tax reduction. Tax them too much, attack them forbeing wealthy, and they just may not show up anymore. In fact, theymight start drinking overseas where the atmosphere is somewhatfriendlier.

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.

Dan Jarka