Thursday, October 23, 2008

Bar Stool Economics (10/22/2008)

Perhaps you've seen this tax analogy before, but I thought it would be worthwhile to share it here.

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 one 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.

It been touted (over and over and over) that under Obama's proposed *spread the wealth* tax plan, 95% of Americans will receive a tax break. Personally, I think it's pretty tricky to provide a tax break for people that already pay no income tax. He should start calling it the Robin Hood Plan- as in, tax the rich and give it to the poor! Obama doesn't plan to cut the bill for the tenth man at all; in fact he is going to substantially raise it, and redistribute that wealth to other (poorer) Americans.

If Obama's tax plan comes to fruition, this is a very real possibility of what the ten men in our story will pay:
The tenth man now pays $75 instead of $59.
The ninth now pays $17 instead of $18.
The eighth now pays $11 instead of $12.
The seventh now pays $6 instead of $7.
The sixth now pays $1 instead of $3.
The fifth now drinks for free, instead of paying $1.
The third and fourth, who used to drink for free, now receive $2 each.
The first and second, who also used to drink for free, now receive $3 each.

Yes, you read that right. Those 40% of Americans that currently pay no income tax will now be receiving money just by existing; money that was provided by the top 5-10% of earners. That is not a tax cut, that is a handout. You can't cut something that doesn't exist.

Furthermore, I doubt that the tenth man has huge piles of money just laying around, waiting to be turned over to the government. This man has two choices; make more money (by raising prices on the products or services he sells), or spend less (by laying off some of his work force). Oh wait! He does have a third option. Picking up his operation and moving to a more inviting environment down the street (Mexico) or across the lake (China).

So the question we're left asking is this- If you were the tenth man under Obama's tax plan, what would you do? And what will the ramifications be for our country?

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