Bar Stool Economics David R. Karerschen, PhD Professor of Economics University of Georgia

Partying and Payment 10 Men go to a bar to drink some beer The tab for all 10 = $100 They are good friends and decide to allocate payment For the bill based on Current US tax law (2008).

10 Men go to a bar to drink some beer

The tab for all 10 = $100

They are good friends and

decide to allocate payment

For the bill based on

Current US tax law (2008).

Payment of the Beer Tab Under the current tax law the payment for the tab would be: 1-4 would pay $0 The 5 th man would pay $1 The 6 th man would pay $3 The 7 th man would pay $7 The 8 th man would pay $12 The 9 th man would pay $18 The 10 th man would pay $59

Under the current tax law the payment for the tab would be:

1-4 would pay $0

The 5 th man would pay $1

The 6 th man would pay $3

The 7 th man would pay $7

The 8 th man would pay $12

The 9 th man would pay $18

The 10 th man would pay $59

Happy with Allocation All of the men are happy with the situation. It accounts for the financial ability for all. All agree to the terms that the situation presents.

All of the men are happy with the situation. It accounts for the financial ability for all. All agree to the terms that the situation presents.

Reduction in the Bar Tab After a period of time, the bar owner is quite happy with the situation and announces that there will be a 20% reduction in their total bar tab.

After a period of time, the bar owner is quite happy with the situation and announces that there will be a 20% reduction in their total bar tab.

How to Share the Savings? The men agreed to pay their bill the same way that they were paying previously. Men 1-4 continued to drink for free But a dispute arose as to how to share the windfall of the 20% reduction of the bar tab.

The men agreed to pay their bill the same way that they were paying previously.

Men 1-4 continued to drink for free

But a dispute arose as to how to share the windfall of the 20% reduction of the bar tab.

Fair Share??? Since 6 men paid for the entire bar tab, they realized that the $20 dollar savings should be divided equally. This would results in a reduction of $3.33 per person This would result in the 5 th and 6 th man being PAID to drink beer. That is not exactly fair.

Since 6 men paid for the entire bar tab, they realized that the $20 dollar savings should be divided equally. This would results in a reduction of $3.33 per person

This would result in the 5 th and 6 th man being PAID to drink beer. That is not exactly fair.

Possible Solution? The bar owner suggested that it would be fair to reduce each man’s bill by roughly the same percentage amount that and calculated the following bill tab for each;

The bar owner suggested that it would be fair to reduce each man’s bill by roughly the same percentage amount that and calculated the following bill tab for each;

A Solution with Savings? Men 1-4 would continue to pay ZERO The 5 th man, like the first 4 would pay ZERO, (a 100% savings) The 6 th man would pay $2 instead of $3 (a 33% savings) The 7 th man would pay $5 instead of $7 (a 28% savings) The 8 th man would pay $9 instead of $12 (a 25% savings) The 9 th man would pay $14 instead of $18 (a 22% savings)

Men 1-4 would continue to pay ZERO

The 5 th man, like the first 4 would pay ZERO, (a 100% savings)

The 6 th man would pay $2 instead of $3 (a 33% savings)

The 7 th man would pay $5 instead of $7 (a 28% savings)

The 8 th man would pay $9 instead of $12 (a 25% savings)

The 9 th man would pay $14 instead of $18 (a 22% savings)

Value to each person? The 10 th man would now pay $49 instead of $59 (a savings of 16% - the lowest savings of all the men) All six paying men are better off than before the discount in the bar tab. The first 4 men continued to drink for FREE.

The 10 th man would now pay $49 instead of $59 (a savings of 16% - the lowest savings of all the men)

All six paying men are better off than before the discount in the bar tab.

The first 4 men continued to drink for FREE.

Better Off Discussion? Once outside the restaurant the men began to compare their savings. “ I only got a dollar out of the $20 savings”, the sixth man pointed out. He points to the 10 th man and says “but he got $10”. “ Yeah, that is right” said the 5 th man, “I only saved a dollar too. It is unfair that he got 10 times more than me!”.

Once outside the restaurant the men began to compare their savings.

“ I only got a dollar out of the $20 savings”, the sixth man pointed out. He points to the 10 th man and says “but he got $10”.

“ Yeah, that is right” said the 5 th man, “I only saved a dollar too. It is unfair that he got 10 times more than me!”.

Better off??? That is true, shouted the 7 th man. Why should he get $10 back when I got only $2? The wealthy get all of the breaks!” “ Wait a minute”, the first 4 men yelled. “We did not get anything at all. The system exploits the poor!”

That is true, shouted the 7 th man. Why should he get $10 back when I got only $2? The wealthy get all of the breaks!”

“ Wait a minute”, the first 4 men yelled. “We did not get anything at all. The system exploits the poor!”

Populist Response The nine men surrounded the 10 th and beat him up.

The nine men surrounded the 10 th and beat him up.

New Outcome? The next night the 10 th man didn't show up for drinks, so the 9 men sat down and had their 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.

The next night the 10 th man didn't show up for drinks, so the 9 men sat down and had their 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.

This is the current US Tax Code Ahh… 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 may just not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Ahh… 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 may just not show up anymore.

In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Karerschen, PhD For those who understand, no explanation is needed. For those who do not understand, no explanation is possible. Professor of Economics, University of Georgia Prepared by: Bryant Nielson, www.BryantNielson.com

For those who understand, no explanation is needed.

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