Raising the bar stool on tax

There is a clever parable doing the rounds at the moment called Bar Stool Economics, widely attributed over the internet to an economics professor at the University of Georgia, David R. Kamerschen. As is so often the case with such internet fodder, he categorically denies the piece – and has set up a web page to do so – as do several other economists who have had it mis-attributed to them. Nevertheless, it’s worth considering this bar stool argument – although it may turn you to drink ...

Suppose that every day, 10 men go out for beer and the bill for all 10 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 10th (the richest) pays $59.

So, that’s what they decided to do. The 10 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 10 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 how could the other six men divide the $20 windfall so that everyone would get his fair share?

They realised 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.

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%).

The eighth now paid $9 instead of $12 (25%).

The ninth now paid $14 instead of $18 (22% savings).

The 10th 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 10th 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 10 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 10th and beat him up.

The next night the 10th 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.

That, boys and girls, journalists and college professors, is how our tax system works. People who pay the highest taxes get the most benefit from a tax cut. Tax them too much, attack them for being wealthy, and they just may not show up anymore – or go drink overseas where it’s friendlier.

For those who understand, no explanation is needed. 

For those who do not understand, no explanation is possible.

Gest the GST?

The Bar Stool piece raises an old argument about GST that once circulated in economic circles. It goes something like this…

GST is 10 percent added to the sale price on goods and services. On a $100 item, that is $10. Say that $100 item was an object sold in a retail store. Assuming profit level is 25 percent on the cost price, equal to 20 percent on the sale price, a reasonable average, then profit on that item is $20.

So, the seller rents premises, employs people, pays taxes and superannuation, services business loans and pays utilities to get that item to market and make $20 profit, or 25 percent profit. The Federal Government collects $10. Most of the administration of receiving this money is already borne by the retailer, whose financial controllers manage the GST process and even pay the cost of transferring those funds to the government as a cost of doing business.

So the government’s $10 is a real 10 percent profit on the total activity of the retailer, or a 12.5 percent profit on the cost of bringing that item to market. It also equals half the profit that the retailer makes, for no input.

So, GST is mathematically a 50 percent immediate tax on the retailer’s profit in this average case. Easy.

That’s elementary and really does take the cake, Dr  Hewson …


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