Monday, January 14, 2008

Bar Stool Economics: Part One


Ok. This is a good one. And it comes in two tremendous installments! Part one sets the scene with this email forward (inaccurately attributed to David R. Kamerschen, an economics professor at the University of Georgia) that landed in my brother's inbox. It's entitled "Bar Stool Economics," and it goes like this:

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 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?' ...

There's a fair bit more to this storyline; read through to its conclusion here. And stay tuned for Part Two, it's a zinger.

2 comments:

shiva said...

I don't see how this thought experiment is at all useful to understand how the tax system is unfair, because it begs the question of the fairness of progressive taxation.

If all the author wanted to do was to appeal to our instinctual judgements of fairness, she could have stopped after the first paragraph. Surely we would think the tenth man's generosity in footing 59% of the bill exceeds any obligation of his to his fellow bar patrons, and that the other men have no reason to complain. Bumping up his rate from 59% to 61.25% doesn't really change anything, and its moral force certainly pales in comparison to the gross imbalance that already exists in the initial set up where everyone seems happy.

If its objective is to chide those who are against tax cuts that favor the rich in absolute terms, the thought experiment again fails. The disgruntlement arising from the distribution of such tax cuts is underwritten by concern that the tax system is not nearly progressive enough-- that the first scenario, in which the tenth man pays $59, is so far from generous that it's actually unjust.

Bonhomie Page said...

Hey Shiva - glad you thought the "thought experiment" hit the wrong note; as you've probably seen on Part Two by now, that was the idea (though my brother's response takes a different approach than yours did) ...