Probably many of you have seen the viral email I refer to. It has variously and falsely been attributed different economics/accounting professors. Snopes has addressed this email, but only to the point of debunking the claims about who its author is.
The email is truly (credit where credit is due) a slick piece of propaganda. The argument, while completely fallacious, is compelling: it paints a homey simplification of the economic stratification of the country; applies some straight-forward logic and arithmetic; and arrives at conclusions that make the idea of cutting taxes on any but the very wealthiest taxpayers seem an abomination.
Given that McCain has apparently seized upon expressing phony horror at the possibility that Obama will use the Office of the President to incite class warfare* as the central theme of his campaign, and given that I have been sent this email twice in recent weeks, I think it's time to dole out ammunition so that people can shoot holes in this foul thing.
* For the truth about the state of class warfare, Warren Buffett's comment is poignant:
"There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning."
I'll post the email as I most recently received it in pieces, interspersing my comments.
Bar Stool Economics
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
This introduction is very clever, really: ten guys going out together for a few beers. All going to the same place, no indication that there is any difference between them, as in for instance one of them having his livelihood depend upon the whim of another. As a parable for America, it would be more accurate to have one go to a secretive, private club, where he drinks rare single malt off the breasts of a virgin; the next goes to a high class bar where he has a martini (shaken, not stirred); the next has a glass of respectable wine at a nice bar; the next has an imported beer; the next couple of guys domestic beer; the next couple stay at home and drink tap water; and the last drinks from a water fountain in the park before trying to find a homeless shelter with an open bed for the night.
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.
With the caveat that the notion that they are all palling around with each other and partaking of the same beverages is, as noted above, complete nonsense when offered as a model of economic class in America, this is probably not an inaccurate depiction of the truth of tax payments in America, if we ignore Social Security taxes and sales taxes.
Notice also the cleverness of making the richest man the tenth and last man, a position connoting humility.
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 on 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.
So on this planet where the rich and poor all march arm-in-arm to the same bar to have a sociable drink together, the government is also running a budget surplus! Well, never mind that; just an aside.
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.
The premise here, that the group "still wanted to pay their bill the way we pay our taxes," is stated and then addressed very ham-handedly: "the way we pay our taxes" is actually a system with a great deal of history and logic (whether you agree with the logic or not) behind it: it is not that we just woke up one morning and found that the rules were that four guys would drink for free, etc.; it is more nearly that our notions of fairness, justice, and humanity, along with our desire to optimize economic incentives, led us to decide upon the system that we have. If the men in the story want to pay the $80 bill in the same way as they paid the $100 bill, they should look back to their notions of fairness, justice, and humanity, and to their perceptions about what will optimize economic incentives, and use those all to guide their determination of how the $80 bill should be paid.
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).
Here, again, the background of the original allocation of the $100 bar tab is given short shrift: arbitrarily, only the new $20 savings is available for consideration, and the discussion is of how to divide it, rather than going back to the root question of how to divide the total cost.
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!"
(Think about how differently this would read if the richest man had been listed as the "first" rather than the "tenth.")
"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.
Notice that in addition to being "tenth," the richest man is also the most passive: the other men are upset and agitated and active, and the poor "tenth" man is just innocently the target of their ire. On the planet I live on, none of the rich people I know are so passive; indeed (conservatives take note), I would say that about the surest way to improve your economic situation is to move your ass and take action!
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!
Another clever unstated premise here: there is something irreplaceable that the rich bring to the table (or to the bar); without them, we'd just founder around aimlessly, having forgotten how to do work and manage a functioning economy and society. There are some people with abilities that would be hard to replace, but in my experience the correlation with having such abilities and being rich is not as great as you might think: a lot of very talented people are very talented because they do not give much thought to anything outside of their area of expertise ... including how best to cash in on their skills. Really, in my experience, the people who become wealthy are most often the people who direct their energies specifically toward becoming wealthy, looking always for advantage, whether with regard to economic processes or with regard to other people. Some of them add a lot of value; others don't. Some even diminish value creation through their efforts: I won't mention any names, but I will say that someone improved my opinion of him quite a bit by focusing his philanthropy on finding a cure for malaria.
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
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
Here the propaganda gets sloppy: there's no need for an address to "boys and girls, journalists and college professors;" it's condescending. And why explicitly state your argument after having so cleverly promoted it through a deceptive parable? People are more likely to believe false arguments when they think they've come up with them on their own! And of course the false attribution is boneheaded, as is the pretentious closing.
Anyway, readers, I think the main response to be made against this email is that the original premise is false: our economic stratification is in no way accurately modeled by ten guys going out to drink together at the same bar, and presumably drinking the same beer in the same amounts. Without that false premise, the whole parable falls apart.