Comments on Taxes: Bar Stool Economics

Mike commented on 'Taxes: Bar Stool Economics'

Mike — Sun, 09 Nov 2008 11:50:52 -0700

Greg has missed the point and has tried to disconnect the amount paid from the amount consumed. If the highest paid patron consumed 250 times the amount as the lowest paid patron, the bill would be higher and the higher paid patron would pay proportionally more.

The analogy is correct as applied to the role of federal government and the benefits received. We all receive the same benefit (beer) from national defense. A wealthy CEO realizes no more personal benefit from our armed forces than does a lower class citizen. The CEO, however, pays substantially more for the benefit. As is clear here, lower class ciizens enjoy much more benefit than upper-class citizens who are actually paying for the benefits.

That said, there is nothing wrong with a progressive tax system. But to say that the rich don't pay their "fair share" is incorrect. To deny this is intellectually dishonest.

Terry commented on 'Taxes: Bar Stool Economics'

Terry — Sat, 01 Nov 2008 12:17:23 -0700

The bartender is an entrepreneur, and it's people like him who made this a great country by: creating jobs, providing a service, and paying lots and lots of taxes. Way more taxes than a non business owner (employee) who takes the easy way out and looks for a job, and pays far less taxes. Employers are the backbone of this country and the tax burden on a business owner is staggering. I don't blame them for outsourcing overseas to lower their operating cost. They can't control the government taxation policies but they can control other expendatures. Raising taxes on the rich will only esculate the problem.

Mundy commented on 'Taxes: Bar Stool Economics'

Mundy — Fri, 31 Oct 2008 08:37:11 -0700

How about the bar tender learn how to run his place so that his expenses aren't all out of control? How the bar tender stop giving away freebies to every dummy that walks in the door? How about the bartender stop paying lazy workers who he cannot fire because, you know, you'll get sued. How about the bartender learn how to live within his means? How about the bartender stop his wasteful R&D, like, the one, "do dogs get drunk." How about that? Then he could lower the prices for everyone!

Scott commented on 'Taxes: Bar Stool Economics'

Scott — Fri, 24 Oct 2008 14:07:07 -0700

"I think concentration within private enterprise, though not insurmountable, tends to stifle competition and consumer choice."

No argument there either. I tend to overstate my case once in awhile, and I don't hold Bill Gates in as high esteem as I seem to here. That was more of a generic wealthy person name to throw out.

Obviously I'm not even going to start on the death tax, but we probably are much closer on many other things than we would have guessed at the beginning. Which is usually what people find when they discuss things reasonably.

Enjoyed the conversation as well. You are welcome back any time and thanks for stopping by.

Greg commented on 'Taxes: Bar Stool Economics'

Greg — Fri, 24 Oct 2008 13:51:52 -0700

Scott, I've enjoyed the conversation. We have some areas of disagreement, but I find your arguments to well thought and expressed.

You correctly gathered my meaning regarding concentration of wealth being detrimental for any society. It obviously concerns me over a wider spectrum than it does you. I agree concentration within government control is most egregious. I think concentration within private enterprise, though not insurmountable, tends to stifle competition and consumer choice. Concentration among private citizens is the least objectionable, but I concede my desire through support for the estate tax to insist on redistributing some of it if it not done so at or before death.

At the risk of going off on a tangent, you hold Bill Gates in higher regard than do I. If Microsoft had never been, Apple and IBM would have served the same need quite nicely. I'm under the impression Microsoft gained a dominant market share over IBM by signing exclusive contracts with computer manufacturers to exclusively pre-install Windows. This was a brilliant decision, but I believe actually precluded consumer choice. Throw in the findings of monopolistic behavior, particularly concerning web browser software, and I begin to cast a skeptical eye on the free market virtues of Microsoft. On the other hand, Mr. Gates has personally become quite the philanthropist, and I have the highest respect for him in this regard.

Scott commented on 'Taxes: Bar Stool Economics'

Scott — Fri, 24 Oct 2008 12:54:14 -0700

Greg -

Good comments. I'm not sure being at a 0.8 really has any meaning. Now, when we talk about totalitarian countries sitting at that level, where the limited wealth of a poor nation is concentrated in the hands of its leaders and thieves, that is definitely a bad thing.

But if Bill Gates and a few of his buddies have unknown trillions while the majority of Americans are still very well off comparitively to the rest of the world's people, and even compared to our own country's history, I don't see the problem. In fact, Bill Gates has already made every single American's life better by the work that made him his gazillions. In a just world, he should have more money than the entire federal government.

The fact is, as the wealth divide grows, the poor and middle classes in America have continued to grow in prosperity as well. Obviously those at the top have more resources with which to increase their wealth if they so choose, so the divide will always deepen. There will always be people who fail or refuse to achieve any measure of financial success, and that is certainly their prerogative.

I never felt you were attempting to make the case for total wealth redistribution, or I would not have responded respectfully to you. We can always argue reasonably about the areas in between. I do disagree with this line, or at least with the manner in which I gathered you meant it:

"Concentration of wealth and influence is bad for any society."

I agree that if this is speaking of government, it is true. For a private citizen, it is a totally different story. When government controls say 1/3 of its nation's wealth, it has the power to use that wealth to adversely affect your life and mine.

Should Bill Gates ever acquire the same amount of money (supposing the rest of the nation was still in relative prosperity) he would still have no power over your life or mine.

And, yes, most people eventually pay taxes. It is worth noting, however, that the group that includes the most amount of people who have yet to pay taxes (people under 30) are historically the most leftist and the ones who fall for the opiate of the masses: pie-in-the-sky government giveaway programs. If they knew what it meant to pay taxes, some of the destructive programs and the politicians who propose them, would likely have been averted. Like the idea of giving loans to everyone, including those who have no ability to ever pay them back.

Greg commented on 'Taxes: Bar Stool Economics'

Greg — Fri, 24 Oct 2008 12:25:11 -0700

Scott, I appreciate your input and find it refreshing to disagree respectfully. I agree with your entire third paragraph concerning opportunity and having no desire for all sharing scarcity.

I hope it is clear I'm not suggesting the wealth need be distributed evenly. Personal contribution through work or other efforts needs to be sufficiently rewarded, and I think it is. I certainly don't wish to trade places with a low income family or welfare recipient. I'm suggesting the rewards need not be limitless for the system to work effectively. The trend suggested by Bernanke's comments makes me nervous. Assuming I understand correctly, there is a wealth concentration measure called the Gini Coefficient. See http://www.federalreserve.gov/pubs/feds/2006/200613/200613pap.pdf0.0 means everyone has the same amount of wealth and 1.0 means one person has all the wealth. The measure as of 2004 was 0.8. At what point should we get nervous? I find some comfort in the fact that this measure has risen rather slowly, so it isn't going to jump to 0.9 in my lifetime or even my children's lifetime.

I don't believe (and doubt you are suggesting) the nearly half of the population not knowing what it means to pay taxes is the same group of people from year to year. Some portion of the group in any given year represents retired people who know full well what it means to pay taxes. I don't know how many people live a reasonably full life without ever paying taxes. I suspect it is a small percentage, but I share your desire to have every able person contribute in some way.

Scott commented on 'Taxes: Bar Stool Economics'

Scott — Fri, 24 Oct 2008 11:42:20 -0700

A reasonable argument Greg, thanks for the input. I happen to disagree. I believe that the person who is making $1 million in a year has more than paid any debt to society through the incredible value of their work to the people willing to make it possible for that person to make $1 million.

I also believe that having nearly half the population not knowing what it means to pay taxes makes ever growing government a promise, an unstoppable reality. I don't care how much beer guy number 10 is drinking, guys 1-4 should be paying for theirs.

Our current system has enabled many to acquire great wealth, while leaving open the possibility for those who have not yet done so to attain the same for themselves. I have no desire for a society where we all share scarcity.

Greg commented on 'Taxes: Bar Stool Economics'

Greg — Fri, 24 Oct 2008 11:33:35 -0700

Hat tip to Jak for his comment. Here are my thoughts:

The bar stool economics metaphor is entertaining, but incomplete. It discusses only the costs and omits the benefits. I suspect proponents of the bar stool economics metaphor conveniently infer that everyone in the group is receiving an identical benefit, i.e. everyone is presumably drinking the same amount of beer. Such an inference would not be analogous to our tax system. In our income tax system, those receiving identical benefits (taxable income / beer) would pay identical costs. How much impact would the story have if the story suggested the person paying $59 drank 250 times more beer than the others, analogous to an average CEO making 250 times the average worker wage. If that were the case, then paying $59 is bargain. I believe progressive tax systems such as our personal income tax are fair and reasonable because the more one benefits from our economic system, the more one should put back in. Concentration of wealth and influence is bad for any society. For some perspective, consider this excerpt from a Feb 2007 speech (transcript at http://www.washingtonpost.com/wp-dyn/content/article/2007/02/06/AR2007020600882.html) given by Fed Chairman Ben Bernake:

"The long-term trend toward greater inequality seen in real wages is also evident in broader measures of financial well-being, such as real household income. For example, the share of income received by households in the top fifth of the income distribution, after taxes have been paid and government transfers have been received, rose from 42 percent in 1979 to 50 percent in 2004, while the share of income received by those in the bottom fifth of the distribution declined from 7 percent to 5 percent. The share of after-tax income garnered by the households in the top 1 percent of the income distribution increased from 8 percent in 1979 to 14 percent in 2004. Even within the top 1 percent, the distribution of income has widened during recent decades."

Captspaulding commented on 'Taxes: Bar Stool Economics'

Captspaulding — Thu, 23 Oct 2008 15:42:50 -0700

Did Jak have a point? I kept nodding off.

Scott commented on 'Taxes: Bar Stool Economics'

Scott — Thu, 23 Oct 2008 12:33:26 -0700

The nine men surrounded the tenth and beat him up. (Wow! ask yourself if we experienced any riots or a revolution during
2002-2007 when the tax cuts took effect)

Um, yeah, figuratively speaking that's exactly what Obama/Biden are doing when they say the rich need to start paying their fair share and being more patriotic. If you can't keep clear in your mind the differences between a fable and a real-life story, perhaps you shouldn't be responding to it.

You also spun a free agreement by the people into an agreement forced by the bar owner.

"The bar owner still liked the idea of flat rates, he was after all a devout republican.
He cranked the numbers. A $10 beer would not help much, he might be able
to increase the revenue to $40, but that last man who was paying nearly
double may drop out and his revenue be reduced to $30. What about a $20
beer, now he could only sell to the top two men -- one with a hefty increase
from $14 to $20. The flat price for beers would not work in any manner."

A smart owner would here make some minor changes to his bar, sell it as a place where losers who can't afford to pay for their own beer won't be allowed, attract a new upscale crowd and charge a price for beer, and new stuff like wine and cocktails, that would give him a significant profit. Since we're being ridiculous.

But note how ridiculous you had to get to twist the fable to make it work your way? They original actually bears some resemblance with reality.

"In fact, they might start drinking overseas
where the atmosphere is somewhat friendlier. But then they find out that the other bars are not as good. All bars have their problems but this is still the best one around."

So you're saying we aren't seeing businesses moving to foreign countries where the tax policies are more favorable? My bad. And is that your idea of fairness? Tax the whatever the hell we want, because we don't think you'll find things so great anywhere else? That's quite a moral position you've got there.

If that's the best you can do, I seriously doubt you want to "discuss the facts about a policy."

Jak commented on 'Taxes: Bar Stool Economics'

Jak — Thu, 23 Oct 2008 12:00:28 -0700

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.

The ten men drank in the bar every day and seemed quite happy with the
arrangement, until one day in 2002, the bar owner, a devout republican, believing in
trickle down economics, tried to spur business more by reducing the
price of the beers. '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 only problem was that
the cost to run the bar remained the same, the bar owner was now in
deficit spending.

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. '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. (Wow! ask yourself if we experienced any riots or a revolution during
2002-2007 when the tax cuts took effect)

The bar owner, did entice some additional business in his bar, but not nearly
enough to stop his swimming in debt. So he decided to raise rates on his
customers. But how would he do this?? He pondered the question.

He entertained the idea of a flat rate for all of the beers. Everyone could pay $9.
This would recover 10% of the lost revenue from the pre 2002 prices and he
could more readily operate the bar without the losses. He did after all attract
some more business due to the lower rates. He performed some more
examination and determined that certainly six of the men would not be able to
pay for the beers. The seventh man who was paying $5 might be able to pay
nearly double for the beer. The remaining three men would certainly come back
since they were paying much less for thier beers. But even counting up
to four men attending, he would only get $36 at
the $9 flat rate. He would have less expenses for the beer consumed, but
it still would not make up for his fixed expenses in running the bar.

The bar owner still liked the idea of flat rates, he was after all a devout republican.
He cranked the numbers. A $10 beer would not help much, he might be able
to increase the revenue to $40, but that last man who was paying nearly
double may drop out and his revenue be reduced to $30. What about a $20
beer, now he could only sell to the top two men -- one with a hefty increase
from $14 to $20. The flat price for beers would not work in any manner.

So the bar owner went back to the progressive pricing system that had seemed
to work well in the past. He decided to keep the prices the same for the lowest
paying customers, but to recover his expenses from the highest paying
customers, still at a lower rate than the pre 2002 pricing.

The first five men (the poorest) still paid nothing.
The sixth would still pay $2 (33% savings from the pre 2002 prices).
The seventh would still pay $5 (28% savings from the pre 2002 prices).
The eighth would still pay $9 (25% savings from the pre 2002 prices).
The ninth would now pay $16. More than he had but still an 11% savings from 2002.
The tenth man (the richest) would now pay $58, about the same as
the original $59, but still lower.

The bar owner was amazed at the amount of complaining from the two richest
men. He had heard all of the complaining from the poorer men about unfairness
of the system when the prices were reduced. But these complaints paled in
comparison to the complaints and threats received from the two richest men.
The two richest men complained about the cost increases (when in actuality
they were still cost decreases from the pre 2002 levels). They complained
even louder about their costs in comparison to the poorer men. The bar owner
tried to explain that he just could not operate at the lower price levels, but
to no avail. The two richest men even threatened to not come back to the bar.
You see, they had become accustomed to paying less for their beers and spending
money elsewhere.

For a time they even left the bar and went to less expensive bars
(some of them even in the Bahamas). But they soon realized that the original
bar was located in a safe area of town, had good roads to get to the bar, the
beer was clear and pure (there were scares of melamine tainting at other bars),
the utilities were constantly on and running, and the air was not polluted.

The two rich men came back to the bar for these reasons and decided
that you have to actually pay for a quality bar.

And that, boys and girls, journalists and college professors, is how anyone can spin a story rather than discuss the facts about
a policy. 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. But then they find out that
the other bars are not as good. All bars have their problems but this is
still the best one around.

Scott commented on 'Taxes: Bar Stool Economics'

Scott — Thu, 23 Oct 2008 11:27:38 -0700

I like the back-to-back comments.

Rose's shows the nice, yet serious, way to respond to an idiotic comment. Capt. shows the sarcastic and not-so-nice way to respond to an idiotic comment.

Both effective, liked 'em both. You each get a gold star.

George - no soup for you.

Captspaulding commented on 'Taxes: Bar Stool Economics'

Captspaulding — Thu, 23 Oct 2008 10:32:18 -0700

george,
You're kidding right? Only poor people enlist to serve? The poor people 'send' their sons to serve? I wasn't aware I could 'send' my adult sons anywhere they didn't want to go...like it's their job to square my bar bill...Read your history, what CREATED this country, and its greatness, was our unwillingness to pay unfair taxes at all! Idiot.

Rose commented on 'Taxes: Bar Stool Economics'

Rose — Thu, 23 Oct 2008 09:36:50 -0700

George -- no, there certainly isn't anything wrong with paying higher taxes. When you file your return, you can send in more than the IRS says you owe. That's allowed. (I personally prefer to donate to more economically efficient charities.) However, requiring the employers and investors to shoulder an even more disproportionate burden, especially in a down economy, is counterproductive.
I think Scott's actual point is that it ignores reality to call retaining the current (and very progressive) tax structure a "break" for the "rich", and that it's easy to convince people who are getting something for nothing that they are being put upon.
There is a fundamental question here -- is tinkering with the tax code something we should do to put butter in the hands of consumers, or guns in the hands of investors? And how much good will those checks do for the "working poor" when they lose their jobs?

george commented on 'Taxes: Bar Stool Economics'

george — Thu, 23 Oct 2008 07:46:17 -0700

If you are rich you shouldn't want to help out the country and pay taxes. Funny the poor aren't patriotic for paying their part I guess is your point. But at least they can send their son into battle instead. There is nothing wrong with paying higher taxes to make this country great.

Rose commented on 'Taxes: Bar Stool Economics'

Rose — Thu, 23 Oct 2008 04:58:41 -0700

This is fantastic, Scott.

Nancy commented on 'Taxes: Bar Stool Economics'

Nancy — Wed, 22 Oct 2008 20:42:40 -0700

That was a really great way to illustrate and explain our tax system, helpful and funny.