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.
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.
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.