This morning, I woke to read a post on Facebook. I debated responding, for I typically don’t like getting into disagreements about politics or religion on Facebook. These people are my friends, family and colleagues, and I don’t wish to alienate them.
However, the longer I digested it, the more upset my stomach grew. It’s clear the wealthy still do not understand the plight of the poor. Below, I’ve posted the “Bar Stool Economics” analogy I read on Facebook, and following, is my response.
The fights down at Occupy Wall Street and other Occupations around the world are not about “getting our fair share” or “beating up on the wealthy.” They aren’t only about taxes. They’re about holding big banks and businesses responsible for decades of abuse of honest, hard-working people.
Let’s not just assign numbers to people. Let’s look at both the haves and the have nots as real human beings. Then, maybe the change we desperately need will emerge.
BAR STOOL ECONOMICS
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100 and if they paid their bill the way we pay our taxes, it would go something
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.” So 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 paid $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 who was now paying nothing, along with the first four. “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 five 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, ladies and gentlemen, 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 atmospheres 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.
THIS WAS MY RESPONSE:
If only everyone would go out drinking together, we could all figure it out.
My guess, though, is the tenth man would never be caught dead at the same bar as the first man, since the tenth man put the first man there by gambling away the first man’s money in hedge funds and bad mortgages.
The second man is a woman, for it should be clear: not all poor or rich people are men. This woman lost her job in 2008 because she worked for the tenth man’s company and they had to downsize. It’s been four years since she’s held a salaried job, and she’s got two sons going to college. She doesn’t know how she’s going to pay outstanding medical bills after her husband died of kidney failure in 2009.
The third man is pushing seventy, unable to retire because his retirement money was tied up in the stock market, so he works at Wal-Mart to make ends meet.
The fourth man is just getting back on his feet after a couple years of unemployment. He temps in a corporate office but loathes his job and the people with whom he works because he watches them scheming to make more money off the pain and suffering of others.
Perhaps, the reason they’re all ganging up on the tenth man isn’t because he “gets all the breaks,” but rather it’s because the tenth man put them there in the first place and wants them to stay there while he continues to profit from poor people’s misfortune.
But maybe I’m over-complicating it.
I, as the esteemed doctor Kamerschen* says, will probably never understand.
* Upon further research, I discovered (after I posted this on Facebook) David R. Kamerschen, Ph.D. didn’t even compose this parable. It’s been clogging email boxes for almost ten years in different forms with spammers attributing it to various economics experts, including Thomas Davies, a Professor of Accounting at the University of South Dakota. While Professor Davies did share this with his graduate students, he did not write the analogy, and he maintains he shared it only to get students to “think outside the box” regarding tax laws.
As with many viral memes, this is inaccurate, overblown and downright destructive. If you see this parable, please debunk the misnomers within, or at least let people know David R. Kamerschen and Professor Thomas Davies did not pen it.
PS – If you’d like to hear an economist debunk this analogy in more detail, Professor Richard Wolff summarizes the problems in the parable with this video.