For Gold, Peace, and Freedom


Why “Progressive” Income Taxes Do Not Equal Progress

November 7th, 2008

progressive-income-tax-fail.jpgToday I ran across an interesting little article that has been showing up in forwarded emails and occasional blog posts recently. Labeled as “Bar Stool Economics”, it is a simplified version of why “progressive” income taxes (that is, taxes that are weighted heavily against people who are relatively wealthy) do not work very well even when we try to lower the overall tax burden. As I have mentioned in a few previous posts, as long as taxes cannot be practically avoided, I would much prefer a consumption-based tax to any type of income tax because people at all levels of income would have an element of choice in how much tax they pay based on their actual spending. Of course, there are also several other advantages, but I will leave those as material for another article.

Our Tax System Explained: 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:

  1. The first four men (the poorest) would pay nothing.
  2. The fifth would pay $1.
  3. The sixth would pay $3.
  4. The seventh would pay $7.
  5. The eighth would pay $12.
  6. The ninth would pay $18.
  7. 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:

  1. The fifth man, like the first four, now paid nothing (100% savings).
  2. The sixth now paid $2 instead of $3 (33%savings).
  3. The seventh now pay $5 instead of $7 (28%savings).
  4. The eighth now paid $9 instead of $12 (25% savings).
  5. The ninth now paid $14 instead of $18 (22% savings).
  6. 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 got.”

“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, ladies and gentlemen, 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

2 Responses to “Why “Progressive” Income Taxes Do Not Equal Progress”

  1. comment number 1 by: Melissa

    This story makes a very good point. Why work harder to earn more when you are going to end up in a higher tax bracket?

  2. comment number 2 by: Viveca

    Very well explained! I am forwarding this link to my niece. I already bought her a copy of “Rich Dad Poor Dad” to get her started on the concept of cashflow .. for all … for anyone who is willing to learn and follow through the old fashioned American way.

    I am also totally for a flat tax. What we have to go through to file our tax returns - the time & the money - is rediculous (and hateful.)


Post Your Comments, Opinions, or Suggestions Here:


Email (optional)

Website (optional)