Saturday, November 08, 2008

bar room econ 101--a tutorial

Complete and total inspiration for this story is supposedly David R. Kamerschen, Ph.D., Professor of Economics (at least that's who the e-mail I saw is attributed to), with no small shout-out to brother Tom for bringing the story to my attention.

Suppose that every day in 1999, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we paid our taxes, it would have split up something like this:

The first four men (the poorest) would have paid nothing.
The fifth would have paid $1.
The sixth would have paid $3.
The seventh would have paid $7.
The eighth would have paid $12.
The ninth would have paid $18.
The tenth man (the richest) would have paid $59. It would have been exorbitant, but if it allowed his friends to have a good time, then he just might do it.

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 in 2002, the owner changed the playing field. "I want you to help build up this area by spending your money in some of the other establishments around here. So, I'm going to reduce the cost of your daily beer by $20. I'm going to accept the loss--that's $20 bucks against my bottom line--in the hopes that you all turn the savings around and help stimulate business in this area' 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 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 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 $50 instead of $59 (15% savings).

Each of the six was better off than before. And the first four continued to drink for free. But after a few days of this arrangement, the men began to compare their savings.

'I only got a dollar out of the $20,'declared the sixth man. He pointed to t he tenth man,' but he got $9!' 'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got nine times more than I!' 'That's true!!' shouted the seventh man. 'Why should he get $9 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 tenth man could only tolerate the whining of the other 9 so much, so he cut down on the number of his appearances at the bar. As a result of this, the 9 other men had fewer nights of drinking for nothing or next-to-nothing--and they blamed the richest guy for this change in their lives.

Then came 2009. The bar owner, disappointed from the lack of development in the neighborhood and sensing a need to do more than "return money to the wealthy customers", decides that he's going to increase the prices in his bar so that he can pay directly for programs designed to economically stabilize the area. So he increases the price of the drinking bill for the group of 10 back to $100, but he INSISTS that nobody except the richest 5% of the group pay any higher tabs. He also promises to decrease the costs for another large part of his clientele, and even provide some rebates to the poorest of his customers. In the end, the owners' new program was going to assess the following costs to the group of drinking buddies:

The first 5 men GET PAID $1.
The sixth man pays $1.
The seventh man pays $4.
The eighth man pays $9.
The ninth man pays $14.
And the tenth man has to pay $77 in order for the bar owner to get the money he needs to pay for his new spending plan.

The next night the tenth man told the group he'd never show up at the bar to drink with them again--he had better things to do than spend $77 with a bunch of guys who thought nothing of the financial sacrifice he was making for them because "he could afford it". The nine, undaunted, arranged for a night at the bar and had beers without the "greedy" guy. But when it came time to pay the bill, they discovered something important: there wasn't enough money between all of them for even half of the bill! In turn, the bar owner didn't get the money he needed in order to pay for his investment in his own bar, much less for any new "neighborhood development" programs. The bar eventually had to close because the only people who drank there were people who couldn't afford to pay their full tabs (as well as the poorest folks, who were waiting for someone wealthy to come in so they could get a rebate from the owner).

And that, ladies and gentlemen, journalists and college professors, is how our tax system works, and how it may very well work under President-elect Obama. The people who pay the highest taxes SHOULD get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, or EXPECT them to continuously act against their own economic self-interest, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.


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