2012, Politics, Society

Bar Stool Economics

I can’t pretend to have been following the wrangling between the NDP and the Liberals over the budget and the prospects of an upcoming election. I guess I just have better things to do. (If we accept that systemic reform at the federal level is the political issue in Canada then a squabble over tax cuts is only business as usual and nothing to really worry about.)

But I can’t help but get a little bit annoyed at this piece of rhetoric finding its way around Ontario by email under the heading “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 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 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.

Ah rhetoric; in this case – as in so many others – posing as good ol’ fashioned, down-home, Everyday Joe common sense.

Though I don’t necessarily dispute one of the main points – that it is utterly silly for those who pay little to know taxes to clamour for the same tax cuts the rich may get – I object to practically everything else in this email.

First, government services as a collective whole – this is a larger amount of things than most people can even keep track of – are hardly equatable to beer (or any other pleasure-causing product). To assume that everyone gets and utilizes the exact same amount of services, and they derive the same things from the services they get / utilize, and that these services – through the people who get them – all impact society in exactly the same way, and that this is equatable to the pleasure gotten from drinking beer in a bar, only serves to completely obscure the nature of government. The analogy is, therefore, flawed from the outset.

The second bad assumption is that a tax cut is “$20” off the old bill. Again, just like the services, such a change effects different people in different ways. But mostly it actually effects the government, or the bartender in this case. Though numerous arguments have been made – especially in the last 30 years – in defense of the “trickle down effect,” I have yet to see any conclusive proof that such a thing exists outside of economic theory. (I would call it classical economic theory but of course it is actually fairly recent economic theory posing as “classical” by making careful selections of certain pieces of very dense and complicated texts – such as the Wealth of Nations – and leaving out anything that would contradict the beliefs of the contemporary economist). Modern societies are far too complicated for anything as simple as the “trickle down effect,” even if something like that intention did exist in the rich. (It is obvious it doesn’t – across the board anyway – because we live in a society with far more taxes than the theoretical free market and yet we live with ever increasing wealth divisions which go against the idea of a trickle down.)

These two flawed assumptions alone mean that the conclusion, which seems totally reasonable from the facts then presented and the method adopted, is utterly worthless.

(As an aside I must also say that the “flight of the rich” threat that ends this story is also ridiculous. Small changes in the tax rate will not cause a mass exodus, no matter what rich people threaten. Look at our history. It just doesn’t happen.)

I can’t say this loudly enough: we are all in this together; rich, poor, whomever. Though it is indeed silly for those with less to get upset about an across-the-board-tax cut favouring those who actually pay more taxes, it is equally (really, more) ridiculous for those who pay more taxes than everyone else to claim those tax rates are akin to slavery or, worse, genocide.

Unfortunately, we live in a complicated world, with an absolutely huge level of government, and we should accept some kind of complicated tax system. (When I say that, I don’t mean complicated in the sense of the United States’ tax system, I mean Canada’s, or other normal tax systems in normal welfare states.) Starting from scratch is probably the best idea.

To truly improve the situation we need to do a number of things:

  • Certain government services need to be thought of differently. This particularly applies to health care. Health insurance has never made any sense. Though I absolutely believe countries as rich as ours should pay for some level of health care for all people within that country, thinking of it as insurance is nonsensical since all people get sick and all people die, whereas not everyone’s house burns down and not everyone gets in car accidents. Considering two- or three-tier systems is also not bad in and of itself. It’s only bad when the higher tiers are used as an excuse to underfund the basic tier.
  • Income taxes should always be progressive. Regardless of where the income comes from, the rich need to pay more than the poor. There is no other way to do to this and the fact that there are millions of (rich) people who don’t agree with this point doesn’t make it less valid. No society has such small class divisions as to make a flat income tax sensible. No government could survive.
  • Sales taxes are a reality. Income taxes alone cannot fund government. But that doesn’t mean they have to be the same across the board. Sales taxes can be progressive as well. Tax rates on extraordinarily large purchases – I had to work hard to replace “obscenely” with “extraordinarily” – do not have to be the same as the tax I pay on my beer tab at the end of the night. Who needs a $350,000 car? If you do, you should have to pay more sales tax for that.
  • User fees are necessary. Government is expensive and debts cannot be reduced at the same time as income tax rates are cut, contrary to many neo-con pundits’ claims. This means: toll roads, user fees for convenience services (online applications and payments, for example) or expedited processing, pollution taxes, congestion taxes, fees for extra garbage, and the like.

These are just a couple of suggestions that a better tax code would include. People would perhaps complain even more, but there would be less need to constantly fight over tax cuts / hikes if the setup made more sense.

In the meantime, we all need to finally accept that citizens pay taxes, and richer citizens pay more taxes. I know we won’t but I can dream.

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