The "Bar Stool Economics," or "How Taxes Work" Email

Today I received, for the first time in probably five years, the "Bar Stool Economics" email. Maybe you've seen it before. It goes something like this:
Suppose that every day, ten men go out for dinner. 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 $7, the eighth $12, the ninth $18, and the tenth man — the richest — would pay $59.

That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement — until one day, the owner threw them a curve (in tax language a tax cut).

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten only cost $80.00.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six — the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?"

The six men 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 end up being PAID to eat their meal. So the restaurant 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 paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. Each of the six was better off than before. And the first four continued to eat 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 who pointed to the tenth. "But he got $7!"

"Yeah, that's right," exclaimed the fifth man, "I only saved a dollar, too . . . It's unfair that he got seven times more than me!".

"That's true!" shouted the seventh man, "why should he get $7 back when I got only $2? 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 he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, is how the 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 at the table anymore.
The "Bar Stool Economics," or "How Taxes Work" email has been attributed to various people, professors and pundits, over the last eight years or so, none of which are accurate.

The parable itself is fallacious for the simple reason that not everyone consumes the same quantity of beer, i.e. receives equal benefits from government-provided goods and services. To quote Martin at Balloon Juice:
The richest [tenth] guy is consuming much, much more [than one beer]. He’s really drinking 8 beers all by himself.

The commerce department provided grants to his company to be more competitive.

The state department helped his company deal with a trade dispute with China.

The military ensured that the goods his company sells can get to foreign countries without being pirated.

When some other companies tried to infringe on his company’s intellectual property, the US judiciary was there to hear the case and take action.

The federal government has worked for two centuries to ensure that we have secure borders, low crime, good infrastructure, fair court systems, a large pool of highly educated workers – and all of those things benefit the guys at the top far more than the folks at the bottom. They’re all profit and success magnifiers.

So yeah, [the tenth guy] makes more, but he’s gotten more help to get there. He just needs to pay for what he’s gotten.
For lengthier, and funnier, responses to the "Bar Stool Economics" email, go to balloon-juice.com and hypocrisy.com.