BAR STOOL ECONOMICS

Hagar

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 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 $49 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 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


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

Stabshauptmann

Great post, something Ive gone blue in the face trying to get across in debates over college fees.

Hagar wrote: »

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2
The seventh now pay $5
The eighth now paid $9
The ninth now paid $14
The tenth now paid $49

But as an aside, are you missing a dollar?

Edit: and in an attempt to find more parables from kamerschen I was disappointed to find out that no one knows who wrote this story
http://www.snopes.com/business/taxes/howtaxes.asp

Capt'n Midnight

Now everyone has to pay $1 extra regardless. And the pensioner in the corner isn't allowed free pretzels anymore.

Lets not forget that three of the men are paying the tenth man $20 a week for their houses.

But it is good that we can only tax the rich as much as we think they would be comfortable paying.

BenjAii

In what fantasy country (Sweden maybe ?) do the richest 10% of people pay 60% of taxes, while the bottom 40% pay none & get supported by the rich ?

EGaffney

BenjAii wrote: »

In what fantasy country (Sweden maybe ?) do the richest 10% of people pay 60% of taxes, while the bottom 40% pay none & get supported by the rich ?

That would be the United States, afaik.

Remember that the top 1% over there are VERY rich.

Capt'n Midnight

EGaffney wrote: »

That would be the United States, afaik.

Remember that the top 1% over there are VERY rich.

don't you mean the top 0.000 08 % ? ( just under 1 in a million )

http://archives.tcm.ie/irishexaminer/1999/07/14/fhead_1.htm

Richard Jolly, author of the report said: “The 200 richest people in the world have more money than the combined income of the lowest 40% of the world’s population,” who number 2.5 billion.

The statistic used to be that Bill Gates had the same wealth as 40-45% percent of the US population. Then again he probably pays more tax than most of the other billionaires because he is resident.

EGaffney

Yep, that was before the big stock market crashes of 2000 and 2008 though so proceed with caution.

Kama

The inportant thing to remember is the LVA always wins, regardless of income distribution

BenjAii

EGaffney wrote: »

That would be the United States, afaik.

Remember that the top 1% over there are VERY rich.

Well I have to admit, this has been an education for me. A quick bit of research (http://www.taxfoundation.org/publications/show/2282.html) seems to backs up these assertions, which I admit surprises me.

However, I think the point made in the original parable is simplistic and disingenuous, as relative to overall income top earners, and i'm especially referring to the mega-rich, pay far less relative to what they keep. Its only that they have so much in the first play that makes the aggregate amount look large.

The story seems to assume society is an equal playing field where everyone has the same chance at getting rich, therefor the rich have the right to everything they own, and its the poors "fault" for being poor. Also that if pushed to give too much of their wealth, the rich have the right to disown the society that made them rich and go somewhere else.

A look at how the oligarchs in Russia gained control of post-Soviet assets is an illustration of the Horatio Alger fantasy of level playing fields.

And the contrast between our consumerist culture of frivolities in the West and ten of thousands of children dying every day for want of clean water is another illustration of the moral imperative of matching needs with wants when it comes to allocating the worlds resources, rather than letting the rich say they should keep all they have as they have managed to gain control of it.

topper75

Taxing the rich heavily is not a problem.

Taxing the people who make things happen in an economy can be.

They are not always one and the same.

eamonnm79

That crap makes Eamonn dumphy's football analogies look well founded.
The funniest bit was when the bar owner reduced their bill by 20%.

In this country the vintners would much rather give that 20% to Dara O Breen for doing awful voiceovers in stupid radio adds, that for the love of Jesus (please someone tell me they dont) dont work.

topper75

eamonnm79 wrote: »

That crap makes Eamonn dumphy's football analogies look well founded.
The funniest bit was when the bar owner reduced their bill by 20%.

In this country the vintners would much rather give that 20% to Dara O Breen for doing awful voiceovers in stupid radio adds, that for the love of Jesus (please someone tell me they dont) dont work.

Those ads are the most cringeworthy ever! I would say 'pathetic' but I could never feel sorry for vintners. Dara O'Brian is no a comedian either - a smartarse, maybe.

Back on topic - the analogy is just saying that by not giving credit to those parties who bring a lot to the table, you are in danger of creating problems for all ultimately. Fair enough. Doesn't make us neocons to acknowledge this.

dresden8

And don't forget the top two guys made a fortune out of work done by the bottom four guys at minimum wage.

eamonnm79

topper75 wrote: »

Those ads are the most cringeworthy ever! I would say 'pathetic' but I could never feel sorry for vintners. Dara O'Brian is no a comedian either - a smartarse, maybe.

Back on topic - the analogy is just saying that by not giving credit to those parties who bring a lot to the table, you are in danger of creating problems for all ultimately. Fair enough. Doesn't make us neocons to acknowledge this.

No, not fair enough.
The people who make the most money in an economy are the people least likely to leave unless they can make more elsewhere(unless its Ireland, where they can pretend they leave, but stay, and make lots of money).

Where would the richest 1% of America go if they wanted to keep making money? They think America is the only place where their dream can happen.

Much more likely guy number 5 or 6 would leave.
Its an awful analogy.
The fact the professor couldnt come up with a better one says a lot for his arguement.

Capt'n Midnight

eamonnm79 wrote:

Where would the richest 1% of America go if they wanted to keep making money? They think America is the only place where their dream can happen.

Tax havens
they would be allowed back for x days a year without affecting thier non-resident status

for ireland its "Present for more than half the tax year, or 280 days over two tax years" , 279 days and you don't have to pay a penny, lots of private jets circling dublin airport at midnight so they can maximise their days. That means you could come back every weekend , every long weekend and still have loads of days

Minder

Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics." Additionally, he does NOT know who wrote it.

http://davidk.myweb.uga.edu/

Stabshauptmann

Minder wrote: »

http://davidk.myweb.uga.edu/

Congrats for not reading the thread, that was mentioned in the 2nd post!

BenjAii wrote: »

In what fantasy country (Sweden maybe ?) do the richest 10% of people pay 60% of taxes, while the bottom 40% pay none & get supported by the rich ?

I dont find it that hard to believe, as it is in Ireland

A)Over a quarter of all income tax paid in the state is paid by the wealthiest 1.5%
B)40% of income earners at the lower end of the income scale pay no income tax.

http://www.finfacts.com/irelandbusinessnews/publish/printer_1000article_1011252.shtml

Minder

Kaptain Redeye wrote: »

Congrats for not reading the thread, that was mentioned in the 2nd post!

Yeah, sorry about that, I missed that bit.

It is an interesting issue, I like this version...

DWayne on October 10th, 2008 5:43 pm Bar stool economics – with one additional assumption

The discussion below based on the assumption that the budget is balanced, and the 10 men only drink what they can afford collectively as a group. The only question then is how to divide up the bill fairly among the people.

But what if the bar bill costs $120 each week, and the ten men agree they will pay $100 of it now and $20 in the following week.

The bartender says “OK – I’ll give you an IOU” but you’ll have to pay interest on it and that will decrease the amount of beer that you and your friends can buy in the future.

And if you don’t pay the IOU off – and the debt keeps getting larger – then your kids will have to assume the debt and it will be passed from generation to generation where it will impact their life. At some point, your kids won’t be able to buy any beer at all, because they are continuing to pay for the beer that you drank in years before. As well as the interest on the IOU. And at some point, I may just have to cut you all off as a group because you owe me too much.

So now the ninth and tenth richest men at the bar push for paying as little as possible - they want the tax cuts ! - and the benefits of the lower bill will go directly to them. They won’t ever pay the IOU – that is someone else’s problem - and they really don’t care about the next generation and their ability to buy beer.

The truth is – it was all about them. The ninth and tenth richest men were so focused on paying the bartender as little as possible each week, that they didn’t realize that their greediness and short-term thinking would eventually shut down the whole system and close the bar.

In the end, the bartender stopped accepting IOUs form the group and the credit dried up. He started by firing half of his waitresses since there were fewer customers to serve. In the end, he couldn’t pay his bills to the supplier and had to go out of business. And this left the nine and tenth richest men with no friends and no place to go out to each week.

And the ninth and tenth richest men looked at each other and said –

“How could this possibly have happened?”

“Could my selfish tax cuts and foolish spending policies over the past eight years have contributed to this?”

And they sat there as if they didn’t know the answer.
And they STILL asked for more tax cuts, because they couldn’t think of anything that was be beneficial for the group.

Source

Stabshauptmann

if thats supposed to be an analogy of the current crisis it fails miserably.

Capt'n Midnight

Capt'n Midnight wrote: »

Tax havens
they would be allowed back for x days a year without affecting thier non-resident status

for ireland its "Present for more than half the tax year, or 280 days over two tax years" , 279 days and you don't have to pay a penny, lots of private jets circling dublin airport at midnight so they can maximise their days. That means you could come back every weekend , every long weekend and still have loads of days

If you leave before 6.00pm*, that day doesn't count.

Or some time..

Stabshauptmann

Its whether you are in the country at midnight, hence why Cap' said "lots of private jets circling dublin airport at midnight"

eamonnm79

Kaptain Redeye wrote: »

if thats supposed to be an analogy of the current crisis it fails miserably.

Grossly simplified right wing analogy.
Your responce "Great post"

Grossly simplified leftist analogy.
See above.

Stabshauptmann

eamonnm79 wrote: »

Grossly simplified right wing analogy.
Your responce "Great post"

Grossly simplified leftist analogy.
See above.

I dont see where left - right economics come into this.

How is it a leftiest analogy?


What is it supposed to be an analogy of (I think the simple fact that thats not clear is justification to say its a poor analogy)?

A)If its supposed to be an analogy of the current crisis, which I asked (Im inferring this from the reference to credit and loans), the you have no understanding of what the current crisis is. It has nothing to do with taxes.

If you are talking about dodgy loans then why are they going to the rich? Also, how is the barman profiting from the loans at all?

B)If this is an analogy about government spending, like the first one:

The gov needs 120eur, people only pay 100, but promise to pay the 20 next week. What is that analogous to? Tax cuts arent tempory, they're not loans.

C)This could be made into an analogy of third world debt. But why is it the richest people are pushing for "tax cuts". The analogy just doesnt make sense.


Coherent right wing analogy = good
Fight the power ramble = poor

Kama

I dont see where left - right economics come into this.

Due to their general respective positions on economic inequality, and their respective weightings of the costs/benefits in either direction? Simplistic mythlike analogies on 'How the Leopard Got Its Spots' lines, rationalizing socio-economic views? A nobly benevolent capitalist, sharing the fruits of his endeavour with the plebs in a spirit of sharing, yet those ungrateful ruffians take exception and violently harass him, ending with no beer for them (moral lesson ahoy) as he emigrates like the proud Ayn Randians they are.

Or, in the other case, a humbled capitalist class, coming to the reflexive end of their selfish policies of externalising cost, bewailing the lost opportunity for social harmony. Lovely stories either way, but argument by analogy breaks down pretty quick once you throw in any reality complicating factors.

Oh wait, I did forgets...this is economics there's no such thing as ideology here :rolleyes:

Stabshauptmann

Sure there are left and right views to economics, but wtf is that rambling story supposed to be an analogy of?

What it reads to me like is:

Well dude, you see the corporations they have all the money like, and they dont pay taxes and they just dont care about anything, right, and thats why, like, the system encourages them, and they just keep ****ting on people, and then they, like you know, the corporations, and thats why the world ended.

Now if thats what you want to call left wing economic theory, I think intelligent left wingers will want little to do with you

Kama

Well dude, you see the corporations they have all the money like, and they dont pay taxes and they just dont care about anything, right, and thats why, like, the system encourages them, and they just keep ****ting on people, and then they, like you know, the corporations, and thats why the world ended.

Yup, and the first one reads as:

'dude, the rich produce everything of value and buy everyone drinks too coz, y'know, they are sound like, and those ungrateful pleb whingers at the lower echelons complain about us getting what's ours anyway, so screw youse all, we're moving to the Caymans'

I'm glad we've both managed to make simplistically reductive narratives even more crude...now can we stop?

Edit (imo if you do want to defend a crude justification of dubious provenance, and actually want ssome reasoned criticism, it would be on the grounds of all pints (rather than people, the egalitarian argument) being created equal; what are the accrued benefits of government to the various strata?)

Stabshauptmann

Listen, Ive asked this 3 times, and thats my limit. I would love to engage in debate with you or anyone else about the merits of that "analogy" but I dont know what its supposed to be an analogy of (because its a non-sensical rant).

It doesnt look like anything or make any sense. Ive asked enough times, Im guessing you dont know what its supposed to be.

Forget about trying to write an analogy, what point are you trying to make?

Stabshauptmann

Firstly, I want to say that I hate editing posts, that I only do it because the mod of this forum asked me to do it.

One of the reasons I hate doing it it because of poster like yourself, who completely change the thrust of their posts after someone has replied to them, rather than writing reply. I fail to see the point of this, I view threads as conversations and expect things to flow post after post. I'll get lost if you make all your replies via edits.

Secondly if the analogy is just, he externalised costs, cos hes greedy, and that lead to failure; grand, but its still a piss poor analogy.

Kama

Both analogies are weak, I'm not a fan of iether of them, I thought that was clear. What's interesting to me is that the first (weak) analogy, explicitly about efficiency in taxation (implicitly about fairness) got 5 thumbs up from most of the economists of the board that I recognise...

Now, your points:

A)If its supposed to be an analogy of the current crisis, which I asked (Im inferring this from the reference to credit and loans), the you have no understanding of what the current crisis is. It has nothing to do with taxes.

The second analogy has more to do with the crunch than the first, as it brings in (crudely) either B: where the tax cut comes from, and where it goes (sovereign debt increases, as notable in the US tax-cutters case), or A: the effects of debt-fueled consumption in the mid-to-lower echelons, where easy credit substituted for stagnant real wages (which I would see as a systemic factor in the current crisis) and risk externalization leading to market failure, as you say.

It's not my analogy, I'm just humoured that the first one is seen as obvious sense while the second is characterized as a 'rant'. Note also that it contains absolutely no mention of corporations, and you have characterized it as a anti-corporate ramble, presumably based on association rather than content...much as the first could be characterized as a right-wing screed. All the easier given how little content they both have...

As said, both are poor, but we could quite constructively discuss why they are poor, in our respective opinions, and without recrimination, neh? I'm not interested in having a hurrah-boo about them, neither is worth cheering imo.


(As to editing, unless it's done a a ret-con for cheap rhetorical purposes, imo it makes for a tidier, easier-to-read thread than a myriad of disconnected one-liners. I'm sorry if it annoys you, I have (now) corrected it to show the point of edit.)

asdasd

The 200 richest people in the world have more money than the combined income of the lowest 40% of the world’s population

If over 70 they should come to Ireland and get a free pension. Poor dears.

It's not my analogy, I'm just humoured that the first one is seen as obvious sense while the second is characterized as a 'rant'.

Marxists are continually "humoured" by economic theories they disagree with, but what's missing is any substantive scientific criticism of the theory and a resort to the argument of "They [the ruling class and their lickspittle economists] would wouldn't they"

This argument is about as useful as the argument argument against "ruling class" evolutionists, or against the "ruling class" global warming hegemony.

The ruling classes, and entrenched scientific classes, say a lot of things but to disprove what they say you cant just say that the ideology is "hegemonic" but actually prove it is wrong. Try that sometime.

Kama

Asdasd, I suspect you're tilting at (Marxist) windmills here, with sinister ideologiekritik and the forces of PostModern-Marxist Ignorance assaulting the Authorized Scientific Establishment...

Firstly, it's a narrative analogy on taxation policy, rather than a scientific theory, so proving it right or wrong isn't really an option; at best it's a thought-experiment, so the 'results' depend largely on how we tweak the context-assumptions. I hope you don't consider the first analogy a scientific economic theory? If so, I probably know some economists who might want a word with you for slandering their discipline!

2nd, I pointed out some aspects which (I thought) were deceptive, and that (imo) its far closer to a morality play than a theory. If questioning tendentious documents (which have been doing the rounds since 2001 at least) makes me Mutant Commie Scum, well zomg I'd better go join the Collective :rolleyes:

3rdly, no offence, but saying 'You Marxist, Me Science' does not an argument make. Would you like to discuss either of the analogies offered so far, or just rail against Marxist devils under the bed?

Edit:

The (more economic) parts of the initial 'model' find most interesting:

Laffer Curve assumptions on optimal taxation, 'Golden Goose' assumption (that the richest generate most, or are more allocatively efficient, Toppers point), equity and initial distribution arguments, relative benefits from government services, justification of tax evasion avoidance, (de)merits of progressive taxation. Any takers?

eamonnm79

Kaptain Redeye wrote: »

I dont see where left - right economics come into this.

How is it a leftiest analogy?


What is it supposed to be an analogy of (I think the simple fact that thats not clear is justification to say its a poor analogy)?

A)If its supposed to be an analogy of the current crisis, which I asked (Im inferring this from the reference to credit and loans), the you have no understanding of what the current crisis is. It has nothing to do with taxes.

If you are talking about dodgy loans then why are they going to the rich? Also, how is the barman profiting from the loans at all?

B)If this is an analogy about government spending, like the first one:

The gov needs 120eur, people only pay 100, but promise to pay the 20 next week. What is that analogous to? Tax cuts arent tempory, they're not loans.

C)This could be made into an analogy of third world debt. But why is it the richest people are pushing for "tax cuts". The analogy just doesnt make sense.


Coherent right wing analogy = good
Fight the power ramble = poor

Put simply

In the first analogy the 9th and especially 10th guy need to be protected and encouraged. In the second analogy they are the "greedy" bad guys.

I was trying to hold up a mirror to show a lantent pre determined bias you may have drawing you towards the first terrible analogy, but not the second terrible analogy.

Any kind of fundimentalism, even economic, can be a dangerous thing. Alan Greenspan, in fairness to him (all be it way too late), admitted as much yesterday.

Its time for more invisible hand free marketeers to examine first principles.