Bar Stool Economics: Part Two

This is part two of a two part post. For those of you just joining us, Part One consisted of this scenario, which reached my brother's inbox. Here's his response, which I post with pride:

Let me see if I understand the analogy by stripping it to its bare essentials.

The owner of the bar is the United States government, the $100 bill symbolizes our taxes, the bar customers are the citizens, and the beer represents the services that are provided to the citizens by the government. At some point, the government reduces taxes by 20%, while still providing the same services. The grateful citizenry initially divides the reduction in proportion with the existing tax scheme. Then, the poorer citizens become upset with their actual savings in real dollars, demand an even larger share of the reduction, and eventually "beat up" the citizen in the highest income bracket-- engaging in class warfare, I suppose. The wealthy citizen then abandons the United States for another country. As a result, the remaining citizens of the United States no longer have enough money to pay for the services that had been provided before.

Then comes the punchline, or lesson: "The people who pay the highest taxes get the most benefit from a tax reduction." As a statement of fact, this is an obvious point, in terms of real dollars. But if the argument is that it is somehow unfair or unjust for some of the poorer citizens to even make the claim that the richest citizen shoulder alarger share of the burden, then I simply don't agree.

Let's start with the sixth man. The example tells us that he pays $2 in taxes instead of $3 in taxes -- a 33% savings. But the example doesn't tell us anything else about the sixth man. So let me provide some other details about his life. He works in a lumber mill in Maine, and earns a total of $5/year. With the $3 he now has (instead of the $2 he previously had, thanks to the 20% tax reduction) he has to pay for the necessities of life -- food for his children, a roof over their heads, health insurance, gas/electricity bills, the costs of their education. After doing so, he has nothing left over. Sometimes he even has difficulty covering those basics.

Providing him a slightly greater benefit, in terms of real dollars, at the expense of the tenth man, would have a huge impact on his basic well-being, while only having a minimal impact on the overall well-being of the tenth man, who has a much larger disposable income. Now, I agree with the general principle that at some point excessive taxation of the tenth man will cause him to either a) stop working or b) move to a country with a reduced tax burden. The amount of taxation certainly should not be a disincentive to work. But the example doesn't tell us anything about how the tenth man earned his money-- or even whether he earned it at all! Did he work hard for it? Or did he simply inherit it? And if the tenth man did in fact earn it, did he do so in part as a result of the "beer" he himself enjoyed throughout his life -- the government services that he received, including safety and security, public schools, a system of transportation upon which to conduct his commerce, and a judicial system to protect his wealth and resolve disputes?

Simply put, the services that the government provides shouldn't be trivialized as merely "beer," something which we enjoy (but ultimately isn't necessary). Our taxes provide for the defense of the country, schools for our children, roads, levees (see New Orleans), bridges (see Minnesota), and dams. A failure to invest in these things can be catastrophic to all of us, from the first man through the tenth man. A failure to invest in our less fortunate fellow citizens (and to give them additional tax relief when the costs of doing so are relatively small and the benefits to them are relatively great) makes us all poorer. With a little bit of extra savings, that sixth man can lead a more productive life -- and perhaps raise children whose hard work, skills, and values enrich the rest of us -- both spiritually and economically. Our individual success and personal wealth (while derived in part from our own hard work, no doubt) also is derived from our collective work as a society and as a nation. In the end, the tenth man might not have the same good fortune "drinking over seas."

I guess you should count me among "those who do not understand."