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David: My former economics professor Richard Wolff is joining us, Professor Emeritus at the University of Massachusetts and also teaching at the new school in New York City. Great to see you again.

Richard Wolff: Thanks for inviting me.

David: So there's been this thing floating around the internet. People have emailed it to me, there's a video of it, and the idea is that it's a very simple way of understanding taxes in the U.S., and it's called Bar Stool Economics. Now, I did a pretty lousy job of explaining why it's simply not valid a couple of weeks ago. Our audience was nice enough that half actually said it was good, but I wanted to bring in, you know, the real experts to analyze this thing with me. You had a chance to review this thing, I'm guessing.

Wolff: Yes, I did.

David: So the idea is that it likens taxes to a bar scenario, and it says that if 10 guys went in to drink one beer each, the people who make the least would get the beer for free and the guy who makes the most would pay the most. Let's start at the beginning. Why is this just fundamentally not a good representation of the tax system in the U.S.?

Wolff: Well, it's on so many levels I kind of wonder where to start.

David: That was my problem.

Wolff: Exactly. And you know, in a sense, to be fair, that's the genius of a good simplification, that it gets away from the details and leaves whoever you're telling it to with a sense that maybe they've grasped the complexity in this little simplified story.

David: That's right. And I even said, you know, the great thing is you can explain that in 30 seconds and it was going to take me 10 minutes to debunk it.

Wolff: Right. [Laughs] Right. So you know, you have to take your hat off to the cleverness of it.

David: Yeah.

Wolff: But once, as someone once said, the devil is in the details, once you actually unpack this story, things get very much more complicated and the outcome is pretty much the opposite of what's said.

Basically, the best way to get at this is historically. What the video talks about basically is the personal income tax and how it works in terms of how it impacts different parts of the community, in terms of raising the money that the government needs to provide services. So when you teach anyone about the tax system, you always have to look at two sides. One, who's paying it and how much, and on the other hand, who's benefiting from it and how much, in order to get a sense of it.

This video cuts all that process short. It makes a very factually incorrect assumption because it has all the fellows at the bar getting the drinks they need and want as if everybody, rich and poor alike, get the same services from the government that their taxes pay for. But that has never been true, that is not true now, and in fact, everybody listening or watching what we're doing today knows that. They know that in the neighborhoods where rich people live, everything is cleaner, everything is nicer, the plantings are better.

Everyone knows, for example, that if you go to the most expensive colleges in the United States, Harvard, Yale, places like that, and you ever study them, you'll discover that they pay no taxes. They are given an incredible allowance being billion-dollar corporations that they pay no taxes at all on the income they earn, the tuition payments, the stock and bond income they earn, and so on, and that allows them to make the education, the four-year education of young people rich enough to go to Harvard and Yale much, much cheaper than it would otherwise be if those people had to pay for a university that in turn had to pay taxes. So you get a completely different payout from government services if you are poor or middle than what you get from the government in services, tax exemptions, and so on if you are rich.

David: So there's two analogies here to the Bar Stool Economics. Number one is the analogy that everybody is getting the same beer is wrong, but number two, the fact that everybody is even drinking at the same bar is wrong.

Wolff: Absolutely, which everybody knows. Everybody knows that if you have a certain kind of money, you're much more likely to be found in an expensive bar, in an expensive lounge, etc., etc., than if you are your average person going to a neighborhood bar, etc., etc. So the game here is to begin, which is what this story does, by positioning everyone equal, which is just plain silly.

The second way to get at the confusion here is just to remember the history of the income tax, because it says really the whole thing. The income tax in the United States was passed in 1910, so we're literally a 100-year-old system. When it was passed, there was great anxiety among the mass of people that they would now suffer a new tax from the government. So when it went through Congress and was passed by the two houses and signed by the president, the promise was made that this tax would never change, and now let me underscore this, from its initial intent, which was to be, and I quote, "a tax on the rich". It was to be a tax that went after the top 1% to 4% of the American people, the richest, because, and this was the argument that was made, they were the most able to pay, and they should be called upon to contribute to the common well-being according to their capacity.

David: And that's the text in the original legislation.

Wolff: Yes, that's the debates, I mean, I don't have the words in front of me, but yes, that was the whole context.

David: Right.

Wolff: And it was passed, and it was levied at first on the rich, and exclusively on them. And the vast majority, 95-or-more percent of the people had no income tax to pay. What you had in the last 100 years, to make a long story short, is a sustained political effort by those at the top to spread the income tax off of their exclusive shoulders and onto everybody else's, and this for two reasons, the more the average person up and down the income distribution had to pay income tax, the less of the special pressure would come on the super-rich to pay that money.

But even more important, the more the tax was spread, the rich understood, the more the mass of people would become their allies in arguing against an income tax, or at least in arguing to keep it down. So what we have is a current income tax that has achieved most of the desires of the super-rich. They now don't pay all of it, they don't even pay anything like all of it. The vast bulk of the taxes are paid by up and down the income distribution. Really only the people at the bottom are exempted from the income tax. Virtually everybody else has to pay it. So if you look at the sweep of history, they have done really extraordinarily well.

Originally posted to David Pakman on Thu Dec 16, 2010 at 08:19 AM PST.

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Comment Preferences

  •  This tells me something important I never knew! (7+ / 0-)

    I somehow never realized that the percentage rate of the tax bracket you're in isn't the rate you pay on all of your income.  I don't know why I never got that, but thank you - this video explained to me that if I make a million dollars, I only pay the top rate on the income that is above the break from the last tax bracket.

    So everybody pays the same rate on the first dollar they make - and the 40,000th dollar they make.  It's just that some of us don't make the 373,650th dollar (I looked up the tax brackets & the site I found also explains this point;  I feel like an idiot) - so we don't pay the top bracket tax rate on anything.  And somebody who earns $373,655 dollars only pays top rate on 5 dollars!  They don't pay any more than anybody else on income in the lower brackets!

    I don't know why, but I never realized that.  I wonder how many other people don't.  It's tremendously important to the discussions that we have about who should shoulder the tax burden - and I know I'm going to incorporate it into my conversations on the subject.

  •  You both miss the real debunking point... (2+ / 0-)
    Recommended by:
    ogre, yoduuuh do or do not

    As an analogy for the progressive tax system, you need to point out that the bar stool scenario shows that every person in the bar is asked to pay the same proportional price for a beer.

    The drinker who makes $100 a week pays $1 for the beer (1% of their income.) The drinker who makes $1000 a week pays $10 for the beer (1% of their income). Proportionally, each is paying an IDENTICAL price based on the reduction of their income resources.

    That's how the income tax system is supposed to work. Yes, rates rise as income rises, but as Warren Buffet has often pointed out, the exemptions and shelters available to the wealthiest Americans means that he pays a SMALLER percentage of his income in taxes than does his secretary.

    In the unlikely story that is America, there has never been anything false about hope. -- Barack Obama

    by HuskerBlue on Thu Dec 16, 2010 at 09:17:36 AM PST

  •  or as a local small business owner (2+ / 0-)
    Recommended by:
    ogre, yoduuuh do or do not
    told me this morning, they used to hate to pay taxes, and complained about having to pay so much in the good years.  Now the business is losing money and they've had a couple years of refunds.  They want the income and the taxes back, they've realized they were way ahead of the game with both.
  •  the rich have argued for EXPANSION (2+ / 0-)

    Back then we had small government, with no real standing army. The revenue needed by the small government was so low, it was only necessary for the FEDERAL GOVT, (not the States) to tax the top 4%, who could afford to pay a bit more.
    Then there was pressure to expand the budget, which required higher tax revenue. So the rich wanted the tax base expanded to the middle class. WAS THE EARLY EXPANSION OF GOVT in order to create a standing army, or to provide "welfare for poor deadbeats"?
    Interesting that the history of the income tax is approximately the opposite of the myth we assume today.

    •  The creation of a standing army was the (2+ / 0-)

      beginning of empire for us and the real beginning of our problems.  As we saw on 9-11, our military is not really capable of protecting us, it is the FBI and local law enforcement that does that.  Our military is for foreign "adventures" protecting the interests of the empire(corporate).  

      "New TSA slogan: can't see London, can't see France, unless we see your underpants."

      by lakehillsliberal on Thu Dec 16, 2010 at 10:21:51 AM PST

      [ Parent ]

  •  I hope this gets rescued. (1+ / 0-)
    Recommended by:
    Calamity Jean

    I think it is important history.

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