Tax Stimulus Reimbursements Compared To Welfare

The following economics and tax system lesson has circulated the Internet for years. The original author is not known. It's popularity is certainly due to its brilliance in illustrating the simplicity between a tax incentive program and a welfare system.

Bar Stool Economics

Imagine that each evening, ten friends go out for a beer and the bill for all ten comes to $100. If they paid their bar bill based on the method we pay our taxes, it would be allocated like this:

• The first four in the group (the poorest) would pay nothing.
• The fifth person would pay $1.
• The sixth person would pay $3.
• The seventh person would pay $7.
• The eighth person would pay $12.
• The ninth person would pay $18.
• The tenth person (the richest) would pay $59.

So, that's what the group decided to do.

 

The ten men drank in the bar each evening and seemed quite happy with the arrangement, until one day, the bar owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily drinks by $20." Beer 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 were unaffected. They would still drink for free. But what about the other six - the paying customers? How could they divide the $20 windfall so that everyone would get a fair share?

 

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth person and the sixth person would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each person's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.  And so:

• The fifth person, like the first four, now paid nothing (100% savings).
• The sixth person now paid $2 instead of $3 (33% savings).
• The seventh person now pay $5 instead of $7 (28% savings).
• The eighth person now paid $9 instead of $12 (25% savings).
• The ninth person now paid $14 instead of $18 (22% savings).
• The tenth person 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.

However, 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, chastised him and eventually 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. They didn't have enough money between all of them for even half of the bill!

 

And that, ladies and gentlemen, professors and students, journalists and activists, 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, chastise them for being successful, attack them for being wealthy, and they will eventually not show up any more. In fact, they might start drinking overseas where the locals are more appreciative and the atmosphere is friendlier.