Question

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 on e 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.

Please read and discuss the article "Bar Stool Economics" (about 2-3 paragraphs)

Answer 1

The "Bar Stool Economics" is a take on the progressive system of taxation. A progressive tax is a tax which imposes a higher tax rate on high income earners whereas the tax rate imposed on lower income groups is comparatively lower. It is based on the taxpayers ability to pay. The rationale behind this is that people with lower income will spend a larger part of their income in order to maintain their standard of living. Thus under a progressive tax system an increment in tax rate will lead to an increased tax burden on the higher income group whereas a tax cut will benefit them the most.

Although progressive tax systems are said to decrease the burden on people who can least afford it, it is often criticized as being discriminatory against the wealthy or the high income earners. The critics argue that this system is for effectively redistributing income but is based on the assumption that majority taxes are used for social welfare. The "bar stool economics" talks about how the money is being raised and who's paying it but does not cover the part regarding who's benefiting from it and how. Also according to the article everybody, rich and poor, are getting the same services from the government, which their taxes pay for. This is not true. In addition to that the article is an extreme simplification of the tax system which in reality is a very complex process with multiple aspects to it.