Bar Stool EconomicsBar Stool EconomicsDavid R. Karerschen, PhD

Professor of Economics University of Georgia

Partying and PaymentPartying and Payment

10 Men go to a bar to drink some beer

The tab for all 10 = $100

They are good friends and decide to allocate payment

For the bill based on Current US tax law (2008).

Payment of the Beer TabPayment of the Beer Tab

Under the current tax law the payment for the tab would be:

1-4 would pay $0 The 5th man would pay $1 The 6th man would pay $3 The 7th man would pay $7 The 8th man would pay $12 The 9th man would pay $18 The 10th man would pay $59

Happy with AllocationHappy with Allocation

All of the men are happy with the situation. It

accounts for the financial ability for all. All agree to

the terms that the situation presents.

Reduction in the Bar TabReduction in the Bar Tab

After a period of time, the bar owner is quite happy with the situation

and announces that there will be a 20% reduction in their total bar

tab.

How to Share the Savings?How to Share the Savings?

The men agreed to pay their bill the same way that they were paying previously.

Men 1-4 continued to drink for free

But a dispute arose as to how to share the windfall of the 20% reduction

of the bar tab.

Fair Share???Fair Share???

Since 6 men paid for the entire bar tab, they realized that the $20 dollar savings should be divided equally. This would

results in a reduction of $3.33 per person

This would result in the 5th and 6th man being PAID to drink beer. That is not

exactly fair.

Possible Solution?Possible Solution?

The bar owner suggested that it would be fair to reduce each man’s bill by roughly the same percentage amount that and calculated the following bill tab for each;

A Solution with Savings?A Solution with Savings?

Men 1-4 would continue to pay ZERO The 5th man, like the first 4 would pay

ZERO, (a 100% savings) The 6th man would pay $2 instead of $3

(a 33% savings) The 7th man would pay $5 instead of $7

(a 28% savings) The 8th man would pay $9 instead of $12

(a 25% savings) The 9th man would pay $14 instead of $18

(a 22% savings)

Value to each person?Value to each person?

The 10th man would now pay $49 instead of $59 (a savings of 16% - the lowest savings of all the men)

All six paying men are better off than before the discount in the bar tab.

The first 4 men continued to drink for FREE.

Better Off Discussion?Better Off Discussion?

Once outside the restaurant the men began to compare their savings.

“I only got a dollar out of the $20 savings”, the sixth man pointed out. He points to the 10th

man and says “but he got $10”.

“Yeah, that is right” said the 5th man, “I only saved a dollar too. It is unfair that he got

10 times more than me!”.

Better off???Better off???

That is true, shouted the 7th man. Why should he get $10 back when I got only $2? The wealthy get all of the breaks!”

“Wait a minute”, the first 4 men yelled. “We did not get anything at all. The

system exploits the poor!”

Populist ResponsePopulist Response

The nine men surrounded the 10th and beat him up.

New Outcome?New Outcome?

The next night the 10th man didn't show up for drinks, so the 9 men sat down and

had their 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.

This is the current US Tax CodeThis is the current US Tax Code

Ahh… that boys, and girls, journalistsand 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 may just not

show up anymore.

In fact, they might start drinking overseas where the atmosphere is somewhat

friendlier.

David R. Karerschen, PhDDavid R. Karerschen, PhD

For those who understand, no explanation is needed.

For those who do not understand, no

explanation is possible.

Professor of Economics, University of GeorgiaPrepared by: Bryant Nielson, www.BryantNielson.com