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Bar Stool Economics

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A real life explanation of the basis of tax cuts and how class envy impacts it.

Published in: Economy & Finance
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Bar Stool Economics

  1. 1. Bar Stool Economics David R. Karerschen, PhD Professor of Economics University of Georgia
  2. 2. Partying and Payment <ul><li>10 Men go to a bar to drink some beer </li></ul><ul><li>The tab for all 10 = $100 </li></ul><ul><li>They are good friends and </li></ul><ul><li>decide to allocate payment </li></ul><ul><li>For the bill based on </li></ul><ul><li>Current US tax law (2008). </li></ul>
  3. 3. Payment of the Beer Tab <ul><li>Under the current tax law the payment for the tab would be: </li></ul><ul><li>1-4 would pay $0 </li></ul><ul><li>The 5 th man would pay $1 </li></ul><ul><li>The 6 th man would pay $3 </li></ul><ul><li>The 7 th man would pay $7 </li></ul><ul><li>The 8 th man would pay $12 </li></ul><ul><li>The 9 th man would pay $18 </li></ul><ul><li>The 10 th man would pay $59 </li></ul>
  4. 4. Happy with Allocation <ul><li>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. </li></ul>
  5. 5. Reduction in the Bar Tab <ul><li>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. </li></ul>
  6. 6. How to Share the Savings? <ul><li>The men agreed to pay their bill the same way that they were paying previously. </li></ul><ul><li>Men 1-4 continued to drink for free </li></ul><ul><li>But a dispute arose as to how to share the windfall of the 20% reduction of the bar tab. </li></ul>
  7. 7. Fair Share??? <ul><li>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 </li></ul><ul><li>This would result in the 5 th and 6 th man being PAID to drink beer. That is not exactly fair. </li></ul>
  8. 8. Possible Solution? <ul><li>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; </li></ul>
  9. 9. A Solution with Savings? <ul><li>Men 1-4 would continue to pay ZERO </li></ul><ul><li>The 5 th man, like the first 4 would pay ZERO, (a 100% savings) </li></ul><ul><li>The 6 th man would pay $2 instead of $3 (a 33% savings) </li></ul><ul><li>The 7 th man would pay $5 instead of $7 (a 28% savings) </li></ul><ul><li>The 8 th man would pay $9 instead of $12 (a 25% savings) </li></ul><ul><li>The 9 th man would pay $14 instead of $18 (a 22% savings) </li></ul>
  10. 10. Value to each person? <ul><li>The 10 th man would now pay $49 instead of $59 (a savings of 16% - the lowest savings of all the men) </li></ul><ul><li>All six paying men are better off than before the discount in the bar tab. </li></ul><ul><li>The first 4 men continued to drink for FREE. </li></ul>
  11. 11. Better Off Discussion? <ul><li>Once outside the restaurant the men began to compare their savings. </li></ul><ul><li>“ 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”. </li></ul><ul><li>“ 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!”. </li></ul>
  12. 12. Better off??? <ul><li>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!” </li></ul><ul><li>“ Wait a minute”, the first 4 men yelled. “We did not get anything at all. The system exploits the poor!” </li></ul>
  13. 13. Populist Response <ul><li>The nine men surrounded the 10 th and beat him up. </li></ul>
  14. 14. New Outcome? <ul><li>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. </li></ul><ul><li>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. </li></ul>
  15. 15. This is the current US Tax Code <ul><li>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. </li></ul><ul><li>Tax them too much, attack them for being wealthy and they may just not show up anymore. </li></ul><ul><li>In fact, they might start drinking overseas where the atmosphere is somewhat friendlier. </li></ul>
  16. 16. David R. Karerschen, PhD <ul><li>For those who understand, no explanation is needed. </li></ul><ul><li>For those who do not understand, no explanation is possible. </li></ul>Professor of Economics, University of Georgia Prepared by: Bryant Nielson, www.BryantNielson.com

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