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. 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 $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.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
Comments
22
soz@u i dont drink
You're bored, I can tell.
Spot on. great journal
sherlock
crossfire is not the place to post this afaik :)
Yes Yes Yes !
its true, but i dont see the point of posting it somewhere where most people dont even have to pay taxes
I'm sorry to say but this is just bullshit...
you can't compare paying for beers to paying taxes. because taxes depend on your income. That's like "Appels en peren vergelijken."

If you really wanted to make a comparison like this it would be with 4 men at the bar. The poorest is in the lowest scale: 33.65% taxes. The 2nd poorest in the 2nd scale: 41.40% taxes. The 2nd richest in the 3rd scale: 42.00% and the richest in the 4th scale: 52.00% taxes.

PS: And after been beaten up my poor fellas, the tenth and most rich person goes home to his 2.000.000€ mansion in Wassenaar or Aerdenhout of which the government paid something like 500.000€ or even more...

And the 4 poor fellas go home to their 200.000€ homes which they paid all by themselves.
It's simplified. You shouldn't take the beer thing literally. It just shows how flawed progressive taxes are and humans.
Parent
laffer curve basically
Yes, indeed. People that don't know about the laffer curve. Remember the game Leisure Suit Larry? The person in that game was named after Larry Laffer. He came up with the Laffer curve which says there is an optimal tax rate. Simply it is about this:
What would the government income be with 0% taxes?
What would the government income be with 100% taxes?
Roughly zero for both. So increasing taxes doesn't necessarily mean higher tax income. There is an optimal level.
Parent
things aren't that linear, because there are different taxes applied deppending on your incomes..
to create a society with medium class, the taxes have to be greater for the richest, because they simply can afford it..
so things don't exaclty work like that
it has been proven that over 50% tax rate, people start leaving the country or try to lower their income so that they are in a lower tax scale, having to pay more than half their income give them the impression to work for the state more than for themselves.
Parent
Flat-tax. Same tax rate for everyone. People with higher incomes will still pay more on an absolute level. It's absurd they have to pay more relatively as well at the moment.
Parent
So should the level of state/government tax revenues be kept at the same level, in which case the lowered tax rate for the people currently in the upper tax bracket would have to be compensated for by an increased tax for the people currently in the lowest tax bracket?

If not, the net result would be a lowering of the total tax revenues. What would the funding of that look like?
Parent
Lowering taxes != Lower income. Not necessarily, read about the Laffer curve.
Parent
Well, since you started the topic you should be able to explain this without having to refer to external sources. You don't need to go over every detail, just outline it.
Parent
Read my reply to kyp.
Simply it is about this:
What would the government income be with 0% taxes?
What would the government income be with 100% taxes?
Roughly zero for both. So increasing taxes doesn't necessarily mean higher tax income. There is an optimal level.

It is very likely taxes are too high at the moment. Lowering them would then increase the tax revenue.
Parent
shakes wrote:
QuoteIt is very likely taxes are too high at the moment. Lowering them would then increase the tax revenue.


That's a pretty interesting statement. How did you arrive at that conclusion? What reason is there to believe that the optimal level isn't in fact higher than the current level?

While I agree on the general premise that either extreme is suboptimal, Laffer and other economists stress that if the Laffer curve should be considered it shouldn't be interpreted in a literall sense.

If you want to lower the tax rate, you should, for reasons of responsibility and committment, demonstrate that it would in fact yield the desired results.
Parent
well maybe i realy don't know much about that..but atm in my country things ain't like that, rich people have more "benefits" and people who has more difficulties is paying high taxes so..very unbalanced.
Parent
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