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. The y 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 dr ink 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

Not sure when this was written, but today its even worse.

www.taxfoundation.org...

Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the "rich" are not paying their fair share of taxes.

Indeed, the IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act.

Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation.

We are definitely overdue for some honesty in the debate over the progressivity of the nation's tax burden before lawmakers enact any new taxes to pay for expanded health care.

A star and flag for you. This is one of the best posts I have ever read on ATS, plus I just love parables for some reason.

This parable, although raising valid points, breaks down for this reason:

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.

If any six men agree to cover the tab for any other four men, then they're obviously gaining utility from the transaction. Maybe the four poorest have somehow managed to be the most entertaining. Or maybe the six richest just enjoy complaining about having to pay for the four poorest. Or maybe the rich guys are just generous, and gain happy feelings from being so. In any event, utility is gained -- or else this scenario wouldn't be taking place.

Dr. David R. Kamerschen seems like he's more interested in pushing ideology than economic theory.

Originally posted by theWCH
This parable, although raising valid points, breaks down for this reason:

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.

If any six men agree to cover the tab for any other four men, then they're obviously gaining utility from the transaction. Maybe the four poorest have somehow managed to be the most entertaining. Or maybe the six richest just enjoy complaining about having to pay for the four poorest. Or maybe the rich guys are just generous, and gain happy feelings from being so. In any event, utility is gained -- or else this scenario wouldn't be taking place.

Dr. David R. Kamerschen seems like he's more interested in pushing ideology than economic theory.

What utility are the 60% who pay taxes getting from the 40% who pay nothing? Happy feelings from generousity only come when the generousity is voluntary, not force. Which brings to light the hypocrasy from the liberals who think the rich don't pay enough, yet they donate far less $ to charities etc. than conservatives. I guess thats why they are the party of "do as I say not as I do".


Sorry to burst your bubble, but his scenario takes place every year, in most cases by April 15th, except if the tenth man doesn't show up/pay up he gets thrown in jail.

No ideology here, just a good analogy of the facts.

It does take place. But it takes place because people -- presumably not you, and certainly not me -- are gaining utility from it.

Watch the flow of money, not the ideology or the party.

[edit on 2-8-2009 by theWCH]

Not again!

I remember answering this fallacy last year!

Oh, For The Love Of....!


This is the most shocking example of mathematical illiteracy I've seen in a very loooong time!

And I've dealt with A LOT of math Illiterates! (Most of them CPA's!)




Very well, School's in session. Pay attention.


10 people. Bar tab for beer= $100


If each paid an equal amount (Fair Share) towards the Tab, each would owe = $10

10 people X $10 = $100



However, per the provided example, 4 of those folks were required to pay nothing, therefore: 10-4= 6.

6 people were left to pay a $100 beer tab.


If each of the remaining 6 drinkers were to pay the same amount toward the bill, each would have owed aproximately $16.67

$100/6 = $16.666666666... (rounded off to : $16.67)



Now, instead of dividing up the bill equally amoung the remaining 6 drinkers, they decided to pay based on their percived ability to afford the expense. The named "Professor of Economics" thusly likens this method to the current income tax system.


Therefore the break down of the original $100 dollar tab looked like this:


Drinkers 1-4 pay - $0 or 0% of the tab
Drinker #5 pays - $1 or 1% of the tab
Drinker #6 pays - $3 or 3% of the tab
Drinker #7 pays - $7 or 7% of the tab
Drinker #8 pays - $12 or 12% of the tab
Drinker #9 pays - $18 or 18% of the tab
Drinker #10 pays - $59 or 59% of the tab

Total $100 or 100% of the tab



Got that?
Pay attention to the Percentages
paid by each of the drinkers. This is where the good Dr. Kemerschen "falls off the wagon"!


In the example, the barkeep, in a show of generosity, gives the drinkers a $20 "rebate". This effectively reduces the beer tab to $80 for the 10 drinkers.

$100 - $20 = $80


Of course, since 4 of those drinkers didn't pay anything in the first place, the remaining 6, paying customers are left to divey up the windfall.

If the drinkers would have stuck to their original plan, as they devised for apportioning the bill, the split would have been easy;


Each payor would have received a portion of the refund equivalent to the portion (percentage) of the bill he paid. Thus:


Drinkers 1-4 paid $0 get $0 back final amount paid = $00.00
Drinker #5 paid $1 gets $0.20 back, final amount paid = $00.80
Drinker #6 paid $3 gets $0.60 back, final amount paid = $ 2.40
Drinker #7 paid $7 gets $1.40 back, final amount paid = $ 5.60
Drinker #8 paid $12 gets $2.40 back, final amount paid = $ 9.60
Drinker #9 paid $18 gets $3.60 back, final amount paid = $14.40
Drinker #10 paid $59 gets $11.80 back, final amount paid = $47.20
Original Tab $100 minus $20/20% rebate = final tab $80.00




The good doctor tried to mislead us into believeing in the inequity of the tax system by erroneously attempting to equally divide the $20 refund offered amoung 6 recipients, when, in fact, those recipients, by virtue of the fact that they had not equally contributed to the expense (the original bar tab, or by analogy, the income tax) were not equally entitled the the same refund.


The tax system does not work that way.

Our tax system is geared such that the more you make, the more you (should) pay. And the more you have paid, the more you should get back, when it is due.


Ah well, I guess it is true;

PHD = Piled Higher, Deeper!

I guess if you tell it often enough, people start to believe it.


Sheesh!

reply to post by theWCH


Why should the rich have to pay for the poor?

Just because one can afford it is NOT a reason to penalize them.

This metaphor, while powerful and instructive, is not exactly perfect because it doesn't take into account the INTERACTIONS between the various men. That is, the rich and the poor aren't merely all "sitting at a bar drinking beer" on a daily basis as equal customers all receiving the same mugs of beer. Rather, the rich use the poor for labor and /or consumption of their products, they extend credit to them at high rates, they forbid them from trampling on their palatial estates, they privatize services from education to sewar lines, leaving the poor with the crumbling public infrastructure, they posess innate advantages in the forms of school and family connections, and so on.

[edit on 8/2/09 by silent thunder]

reply to post by Bhadhidar


Fallacy? Because the author rounded the numbers to the dollar and you didn't? Regardless, the rich guy paid more and when the price dropped got more back. While the analogy may not be exact, I think the average person can understand the similarities.

The fact is, you cannot tax your way to prosperity and given the disproportionate tax rates in this country unemployment is going to continue to rise.

Originally posted by theWCH
It does take place. But it takes place because people -- presumably not you, and certainly not me -- are gaining utility from it.

Watch the flow of money, not the ideology or the party.

[edit on 2-8-2009 by theWCH]

The only thing I see people gaining is the ability to sit home and draw unemployment.

Flow of money? Continue to over tax the rich and watch the flow continue to decline.

[edit on 2-8-2009 by mhc_70]

reply to post by silent thunder


I really don't understand this mentality. What happened to the American dream? Do you believe its not out there for anybody willing to work hard enough to get it?

When people stop pointing their fingers at others and point the finger at themself is when things begin to change for them.

Just because you feel they may have an advantage does not minimalize your oppurtunity, unless you allow it to.

[edit on 2-8-2009 by mhc_70]

reply to post by mhc_70



The Fallacy has nothing to do with "rounding numbers" as you put it.

The good doctor tried to mislead us into believeing in the inequity of the tax system by erroneously attempting to equally divide the $20 refund offered amoung 6 recipients, when, in fact, those recipients, by virtue of the fact that they had not equally contributed to the expense (the original bar tab, or by analogy, the income tax) were not equally entitled the the same refund.


The tax system does not work that way.

Our tax system is geared such that the more you make, the more you (should) pay. And the more you have paid, the more you should get back, when it is due.

The fallacy inherent in the analogy presented by the professor, and explained in the above quote, is that six beer drinkers should somehow expect to share Equally in a refund they did not equally deserve by virtue of Inequal the payments each made.


In essence, our tax system is designed such that the more you make, the more you pay.

And, when you've paid too much, the more you've over paid, the more you get back as a refund.



Would you have it such that the more you've paid, the Less you get back as an refund on overpayments?


That, in my opinion, would be a true inequity.



I'm sorry, but it appears that you either did not fully understand the analogy as presented, or you are attempting to deflect our attention away from the basic flaw in the anaolgy's logic so as to further an ideological agenda. Which you seem unwilling to state plainly, and openly.


I will agree with you however, that Most people will think that they understend the analogy , as presented.



But then, Most people will believe anything, especially if it come from the mouth of a supposed "expert".

More's the pity.

reply to post by Bhadhidar


I see your point, but it has no bearing on the theme of the analogy, at least as I see it. What I take from it is that a tax reduction helps those with the higher tax burden more than those who pay less or no taxes, which is incorrectly percieved by many as an unfair benefit. This happens in the real world eveyday. Take Exxon for example, people were all up in arms when they released their profit figures, but failed to look at the how much they paid out in taxes or the single digit profit margin they operate with. This analogy helps people see the whole picture and what happens when you overtax the rich, regardless if it does not follow the tax structure to a T.

The deflection, IMO, was an attempt to debunk the analogy by pointing out a totally irrelevant flaw, which has no bearing on the point it makes, what happens when you over tax the rich, which is easily understood by the analogy as it is written.

Why do people have such a hard time understanding that when you raise taxes, you increase the price of the products and services the wealthy business owners provide as well as raise the unemployment level. This affects the wealthy and the poor alike. It discourages the producers from producing and encourages the non producers to continue to do nothing but point the finger. Somebody once said "taxing the rich in an attempt to bring prosperity to all, is like standing in a bucket and wondering why you can't lift it with the handle."

This is a capitalist society and there are flaws. I agree that it seems unfair the income gaps between the uber wealthy and the average guy, but over taxing them is counterproudctive to the economy and the common good of the people, including the poorest.

The purpose of this thread was to point out that the top 1% of income earners pay more in taxes than 95% of those in lower income brackets. Or you could say 1.4 million people pay more than 134 million other tax payers combined. We have the most progressive taxes in the world, but there are those that feel it is still not progressive enough.

Indeed, the IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act.

yet there are those on this board that feel it should be higher???

At what point will they be satisfied? When unemployment is over 20%, or maybe when all the uber rich move their money to more tax friendly nations?

Originally posted by mhc_70
reply to post by silent thunder

 

I really don't understand this mentality. What happened to the American dream? Do you believe its not out there for anybody willing to work hard enough to get it?

When people stop pointing their fingers at others and point the finger at themself is when things begin to change for them.

Just because you feel they may have an advantage does not minimalize your oppurtunity, unless you allow it to.

[edit on 2-8-2009 by mhc_70]

No offence, but I don't understand what your post has to do with mine. I pointed out some holes in the OP's metaphor and you went off on a tirade about the American dream and "pointing fingers at others" and so on, projecting all this stuff on to me that has nothing to do with my own beliefs or the subject of my post.

Originally posted by silent thunder
This metaphor, while powerful and instructive, is not exactly perfect because it doesn't take into account the INTERACTIONS between the various men. That is, the rich and the poor aren't merely all "sitting at a bar drinking beer" on a daily basis as equal customers all receiving the same mugs of beer. Rather, the rich use the poor for labor and /or consumption of their products, they extend credit to them at high rates, they forbid them from trampling on their palatial estates, they privatize services from education to sewar lines, leaving the poor with the crumbling public infrastructure, they posess innate advantages in the forms of school and family connections, and so on.

[edit on 8/2/09 by silent thunder]

My apologies if I misunderstood your intent. My reply was directed at the last part of your post.

Maybe it was a knee-jerk reaction to the common attitude of pointing of the finger, instead of the poor going out and trying to make a difference in their own life, not saying that some don't.

The scenario doesn't say who's drinking the most beer does it?

In the Bar of America the richest 2 guys drink 85% of the beer!

reply to post by Bhadhidar


I was thinking the same thing

Switched from percentages to add up the pay to subtraction.