Thursday, October 9, 2008

Economic Lesson

This came from someone who works for Fidelity Investments:
Subject: Economics
OK, you don't have to drink beer to appreciate this.
Our Tax System Explained: Bar Stool Economics
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 curve. 'Since you're all such good customers,' he said, 'I'm going to reduce the cost ofyour 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 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 got'. '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 forbeing wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.


  1. I LOVE this lesson! So true! And the entitlement generation of today and tomorrow would just blow this off as a "rich" persons explanation. I am not rich, probably won't be until I get to heaven, but I am thankful for those who have more, pay more, and help the common man pay less taxes. So why shouldn't he get a bigger cut of the tax breaks?

    Thanks for a simple lesson of how our country is run.

  2. So, is this what could happen with socialized medicine? More people served for less money. This is a question (maybe for your friend), no joke about it.

  3. Jana Mc - glad you enjoyed the post.

    Helen - I certainly can't answer that question, but I think socialized medicine is worth studying. My husband lived in a country with socialized medicine and they were treated very well. Others speak negatively about it. I'm not sure what the answer is, but there needs to be a HUGE reform in health care. My children's nanny is in her late 50's and did not have any medical coverage. She paid out-of-pocket to be diagnosed with cancer but could not afford any treatment. It took several months for her to receive some help. She has never married, doesn't have children, and was refused public assistance. Her cancer is in remission and, after three years is now receiving $362 a month to live on. If it wasn't for her brother who pays her mortgage, she would be destitute. America should do better.