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Bar Stool Economics - A quick course in taxes & human nature

Posted by Dr. Ray Usell on Saturday, September 27, 2008 8:11:38 PM

The post below is available elsewhere on the Net, but I wanted it here because it fits in with other posts.  It was created by an economist with impressive credentials.  See    http://davidk.myweb.uga.edu/    

There are two major points:  1) The obvious point about progressive taxation and people's natural reactions to it, and 2) The way words can be used to distort the underlying reality of the situation. 

Bar Stool Economics - only for those who drink beer! 

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.

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 an amount related to how much they are paying, 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 paid $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.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
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Obama Caricature Speech

Posted by Dr. Ray Usell on Thursday, September 11, 2008 1:45:22 PM
A TV interviewer asked Sen. Obama why he wanted to raise the Capital Gains Tax when history shows that raising it decreases federal revenue and lowering it increases revenue due to the impact taxes have on economic activity.  His answer was "out of a sense of fairness".
 
I wrote the speech below for friends that often travel abroad.  As you read it, decide whether these are the thought processes you want to drive tax policy.  Please forward to anyone that may be interested.
 
Welcome President Obama.
 
My fellow Americans, I come to you tonight to announce a new Fairness Doctrine, the first of a series.  This one is called "The Foreign Travel Fairness Doctrine".
 
As you may know, a small minority of our citizens flit around the world on lavish vacation after vacation, while the rest of us stay home.  This is plainly unfair.  It is unfair to the rest of us and it is unfair to our Fellow World Citizens who only see a narrow portion of our population.
 
To rectify this unfairness, I announce a three part plan.
 
First, I will create a "Foreign Travel Fairness Tax".  And, to be fair, I will set the rate at only 50%.  Here is how it works.  If someone travels abroad and spends, say, $10,000 for the trip including transportation, fees, food, tips, gifts,...everything, upon their return, they owe $5000 in tax.  This money will partly fund parts 2 and 3 of the plan.
 
Second, this is a job creation plan.  I will create at least 5000 new IRS positions to work out the details of the tax, create reporting forms, and most importantly, conduct foreign surveilance to detect potential loopholes and tax avoidance schemes.  This extensive foreign travel will expose our Fellow World Citizens to our middle class working population.
 
In addition, thousands of new H&R Block and other tax preparation jobs will be created to help travelers with the complexities of reporting.
 
Third, this plan includes giving "deserving poor" the opportunity to travel. The Foreign Travel Fairness Tax Rebate must be given to our poor that have demonstrated a willingness and ability for foreign travel.  Therefore, we will give the Rebates to illegal immigrants who have, by definition, demonstrated their mobility.  And while we are at it, we'll make them citizens, hopefully by next November or for sure the one after that.  This will give our Fellow World Citizens exposure to our poor.
 
I have proposed this Comprehensive Fairness Doctrine out of my firm belief, that the duty of the Federal Goverment is providing Life, Liberty, and the pursuit of Fairness.
 
Thank you and good night.
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