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Saturday, January 23, 2010

Bar Stool Economics

Just read this and found it pretty cool. Since it was on Taxes, I thought you should be dying to read this one, in all 'certaininty'.

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, ladies and gentlemen, 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.

Thanks Dr. David R. Kamerschen

6 comments:

kida said...

Excellent article, I had read it some years back, but will always appreciate the logic, especially after getting to be in the later part of the bracket :-)

Sudhir Pai said...

@kida: I just love it when somebody can explain something so simply. THere's another such post here.

http://mypaisworth.blogspot.com/2008/10/fast-forward-bankruptcy.html

sunny...dead said...

Very nicely explained...

Sudhir Pai said...

@sunny: Now I'm all in favour of the super rich getting their tax benefits.

Jessica said...

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Raghav503 said...

Very well written...
Enjoyed reading it...