The Libertarian Party of Pennsylvania - Forum

Spot the differences between Version 1 of the story and Version 2, below. Then check out the analysis at http://geophysics.vox.com/library/post/taxes-bar-stool-economics.html and see if you agree.

Version 1:

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 bar, 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 did!"

"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 any more. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Version 2:

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 decided that "fair share" meant changing the amount so that most of them had the chance to save up more and become rich. So, the bar owner came up with the new payment plan. And so:

    The fifth man, like the first four, now paid nothing (100% savings).
    The sixth now paid $1 instead of $3 (67% savings).
    The seventh now pay $3 instead of $7 (57% savings).
    The eighth now paid $7 instead of $12 (42% savings).
    The ninth now paid $15 instead of $18 (17% savings).
    The tenth now paid $54 instead of $59 (8% savings).

Each of the six was better off than before. And the first four continued to drink for free. Once outside the bar, the men began to compare their savings.

"What should I do with my extra money?" asked the sixth man.

"Yeah, that's a good question!" exclaimed the fifth man. "I've got an extra couple of bucks "“ what should I do?"

"Save it" advised the tenth man. So they all saved their extra money for a month, then went and spent it on another round of beer. As a result, the bar tender was able to make more profit, which allowed him to lower his prices further. And the men were able to drink more often for less money. And that made everyone very happy indeed.

Mik,

I read the link and one statement stuck out:

"You see, what this piece ignores is the purpose of the tax code. If you are like most people, you probably think that the idea behind taxes is to pay the government's bills [1]. But, in the words of my structural geology professor, that answer is correct but not complete because taxes do more than pay bills. They also shape our society."

Should society shape government or should government shape society?

Since neither is perfect, I'd perfer the former.  With the latter you get government with the personality types that are actively driven to pursue a role in government.  That's what we have now.  How's that working out?

I wonder what would happen if everyone would stop smoking and drinking. Would government declare "mission accopmplished" or would it scream in terror "What have we done?  We lost all that revenue!  Quick, let's create some new vices to tax!  And let's stop all those anti-smoking and anti-drinking programs."  I'd bet they'd react with the latter. 

That gets me thinking about the premise of the question I posed above.  Government attitude regarding taxes is pretty apparent.  I've read that we still have taxes in place to pay for the Spanish-American War.  There are tax cuts in place now that will soon expire. 

Let's see -- taxes are permanent, but tax cuts have expiration dates.  All that has little to do with shaping society.  The real goal of taxes must be to preserve government no matter what shape society takes. 

Mark

Good points, Mark.

This is where we get into normative economics and value judgments. Normative economics concerns what "ought to be" instead of the "what is" of positive economics. Sadly, many people today are sold on the idea that we need a mixed economy (combining a free market with significant government oversight and regulated outcomes).

I think one problem with having the government make those value judgments is that not everyone will agree with them, although all will be affected. It would be better (and fairer) to allow people to make their own value judgments in a free market economy.

The other problem I have with the second version is that they are saving $20 per event, enough to give them a free night of drinking every week, yet they spend it on extra beer. The goal of having more save to become rich is not realized. The value judgment of the "fair share" doesn't work, especially for the poorest, who saved nothing under the new conditions. 

Further, the second scenario indicates that more beer purchased means more profit for the bartender and further price reductions of beer. If this keeps up, beer should be free for everyone soon. What is not factored in is that increased demand will bring pressure to increase the beer prices.

Normative economics can provide the appearance of achieving certain goals. In the second scenario the "middle class" had the opportunity to save and become rich, but blew it all on beer. In reality, the long term effects are often the opposite of the intent.

A price floor for milk to help save family farms only results in milk being overproduced, eventually leading to a milk market that will not support as many producers. A higher minimum wage will increase the wealth of some working families until the labor market will not support as many workers. Similar things happen if upper limits are put on prices.

It sort of makes me wish I had studied economics more.

Right here with you Sir, I'm most certainly in favor of society affecting and shaping government, not 'tother way round. Doesn't take much of a genius to read 1984 and realize it's not all that far fetched in terms of what lengths people will go to in order to control other people for their own selfish reasons. I'm already working for the government and held to strict rules every day I put on my USMC uniform, I don't need self-righteous elitist a-holes to tell me what I can or can't do in my own home after the day is done.

The second highlighted portion is EXACTLY what the government would do if they didn't have those mighty fine streams of revenue to tax, they'd shift it to different activities under the guise of "public health". Instead of taxes on cigarettes, you'd have taxes on fast food and other things deemed "unhealthy" all to prove that the Government is just trying to protect you because you're too stupid to protect yourself. >:(

And not to mention, don't most Anti-Smoking programs receive their funding from TOBACCO companies? ::)

More good points. Once you have the government start being the judge of what is good and bad in society, where does it stop?

As government interference in markets increases, citizens become more and more a resource to be managed. We can see this happening before our very eyes in the United States today.

In 1941 war was declared by congress on an attacker and citizens were asked to sacrifice and help the effort through rationing, scrap drives, and civil defense drills. In 2001 war was proclaimed by the president on a tactic and people were asked to help by going shopping. It is a shift in mentality to the idea that the government will rule over and handle things (particularly the economy) for the people rather than the government arising from and representing the people.

This leads to ideas like people's homes can be taken solely to be replaced with something generating more tax revenue, and personal choices should be regulated because the government may have to fund the resulting medical costs. Securing individual rights goes out the window at this point.

The problem with a mixed economy is the tendency toward more socialism as ever-increasing regulation is necessary to address the unintended consequences of the previous regulations. In the end, it is a choice between delving fully into socialism or moving back toward free market principles. We are at that point in the United States right now!!!

Which way will prevail is still up in the air, but it sure looks like nationalization of some industries is impending.

marinejcksn,

At the risk of being off-topic on this off-topic post, I noticed that your signature line seemed familiar to something else that I couldn't quite place -- until today.

"The Conservative knows that to regard man as part of an undifferentiated mass is to consign him to ultimate slavery." -- Barry M. Goldwater

A noteworthy Pennsylvanian once warned of another ploy to transition people into slavery. His warning is just as appropriate today as it was long ago.

"Necessity, it has been said, is the plea for every infringement of human liberty; it is the argument of tyrants and the creed of slaves."  -- William Penn 

Mark