The Barstool Economics Parable is A Fairytale

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I hate the Barstool Economics story. Hate. 

For those of you that aren’t familiar with it, it’s a metaphorical tale meant to illustrate the “risks” of over-taxing the rich in the progressive tax system. You can read it here.

It’s popular in Canada right now, particularly Alberta, because my province recently elected a government that wants to do absurd things like raise corporate taxes from 10% to 12% and use the money to fund schools and hospitals.

The barstool economics tale appeared in an article in the Globe & Mail yesterday morning. The story was slightly changed to illustrate the story as dinner in a restaurant instead of beers at a pub, probably to appeal to readers of more delicate sensibilities and avoid copyright infringement. 

The comments that followed were rather enthusiastic, and I was happy to see that a good number of people understood that the barstool economics story is total BS.

The REAL Barstool Economics Parable

Each and every day, 10 men go to a pub for beer together.

The bill for all 10 comes to $100 each day. If the bill were paid the way we pay our taxes, the first four would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The 10th man – the richest – would pay $59.

Although the 10 men didn’t share the bill equally, they all seemed content enough with the arrangement. Mostly because they didn’t understand how rich the 10th man was.

The 10th man actually owns the bar they’re drinking in, as well as the brewery that serves it.

Business is good, so it provides him a tidy profit each year. A few years ago, he used some of the revenue to expand the business, and created a multi-national franchise that provides him millions of dollars each year.

Of course, his business is incorporated which lets him select how he wants to pay himself.

He takes a multi-million dollar salary from the company, but he also pays himself, as well as his wife and adult children, dividends.

Dividends are taxed at a lower rate than employment income, so this lets our rich man keep more money in his pocket. Finally, running a multinational corporation allows him write-off international trips as “business expenses”, and regularly dines at luxury restaurants and buys personal items for “work”. As a result, much of the lifestyle he enjoys he doesn’t actually pay for with his income at all!

The other 9 men he drinks with know their friend is very wealthy, but they don’t know he is actually stupid rich.

Since they earn a range of salaries hovering around the national average of $50,000 per year, they are blissfully ignorant that their friend makes the same amount in less than one week. And the rich man is happy to keep it that way.

He likes these guys, he doesn’t want to inspire any feelings of jealousy or resentment amongst his friends. He also doesn’t want to dole out any handouts.

On these nights that he drinks with his friends, he is happy to pay $59 of the $100 tab, because he knows the money is essentially going right back into his own pocket.

Besides, as the owner, most nights he dines and drinks for free. Cheers.

And that, friends, is why I hate Barstool Economics.

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13 Comments. Leave new

  • YES.

    Reply
  • The only way you can be “stupid” rich is if you inherit it and you’re not that bright…. and you won’t be rich very long.

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    • “stupid rich” doesn’t mean bad with money, the same way “filthy rich” doesn’t mean dirty money.

      “Stupid rich” refers to having an incomprehensible amount of wealth that is more or less unlimited, and wholly unattainable by the average person.

      Reply
  • Re: Dividends — that credit has diminished significantly and is almost on par now as paying yourself a salary. Still has an advantage over a salary, but it is not as lucrative as it was before.

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  • While it may not be rigorous economic theory, it does do a good job of illustrating some of the considerations involved with complex macroeconomic policy and finance. While your opposition to barstool economics is noted, your post fails to explain your position at all. That’s the problem with regular folk making judgments about economic policy. Often it’s a simple case of the blind leading the blind.

    Reply
    • The goal of the post wasn’t to explain my position, or even disclose my position, which is why you can’t find it. The purpose of this post is simply to point out the major shortfall of the metaphor.

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      • However Bridget, you have overlooked the fact that you fail to elaborate on the positions of the 5 lower income people. They essentially are a drain on society, they likely don’t work, collect welfare and other social programs, and likely have more ambition to work the system than to contribute to the greater good (See? I can make assumptions too). Yet there are 5 of them and one rich guy, an alarming ratio. In contrast, the rich could also simply be a Doctor, Engineer, Lawyer, etc. Maybe you’re right and the rich guy does benefit from all that you’ve outlined above, but the bottom line is he created that corporation, assumed risk, put up capital, was fiscally prudent and created a burgeoning business. In good times, that business potentially employs all the men ‘below’ him, but raise corporate tax, eliminate incentive to invest in this country and all of it goes away. Further, what about charitable donations? Sure individuals and corporations get tax incentives to donate to worthy causes, but how many millions of dollars come into the hands of these causes by way of donation. There are many rich people that donate millions of their personal dollars to charities every year. Should we expect even more from them just because they’ve done well? I’ve seen other posts similar to yours and while they aim to debunk the example, they don’t look at the whole story. In my opinion it’s meant to be a simplistic parable with the intent to demonstrate that the same tax cut for all parties will not equal an equal dollar amount. Although you state the goal isn’t to disclose your position, I feel that by only focusing on the wealthy man, you indicate your position indirectly.

        Reply
  • Very different from the version I’ve come to know. This example was used on multiple occasions to help explain scenarios for what would happen if taxes were raised on different categories of the population (i.e. the person making the least paid a bit more, or if taxes were raised on the top earner to the point where he left, or if there was a flat tax system in the United States).

    In any case, you hate the parable because someone who owns a successful business makes more than someone who just works an average day job? Or that he/she doesn’t always have to “pay” (they still pay when they eat for free- it’s taken out of the profit) when they frequent their own establishment?

    Sorry, I just can’t agree with this mentality, unless we also hate the unsuccessful business owner. What we hate them for though, I’m unsure (maybe for running a poor operation?).

    Can you please elaborate as to why you hate successful people that don’t take advantage of their patrons?

    Reply
    • Who said anything about hating successful people or demonizing business owners? Last I checked I was raking in a good salary whilst running a profitable company of my own on the side. I’m hardly one to point fingers at people that grab a bigger share of the pie.

      The example was merely to illustrate why we shouldn’t feel sorry for — let alone give more tax breaks — to the rich. They’re already taken care of. Most people don’t even realize how well the rich are actually doing, hence the example. This post was written when the NDP (a decidedly left-leaning government) was newly elected in Alberta (Canada’s most right-leaning province). They raised taxes for people earning more than $125,000 per year and promptly dumped millions of dollars into the public school system and healthcare. America would go apeshit if this happened in the good ol’ US of A. Thankfully we don’t have quite the same wealth inequality problem up here as you do down south, maybe we have the nerve to acknowledge that the rich are filthy rich and getting richer and not merely “successful businessmen”.

      Don’t get too tired jumping to conclusions over there, you’ll wear yourself out.

      Reply
      • It’s not a matter of feeling sorry for anyone, rich or otherwise. The issue is the economic consequence of over taxation on those providers of domestic wealth and/or employment. You, however, seem to be fixated on the rhetorical ‘haves and have nots’ paradigm simply for the sake of the thing itself. It is baseless, infantile, and unscientific. Moreover, you do so with zero consideration to subsidies, the tax code, special interests, liquidity bailouts, easing, interest rates, business cycles, international competition–or any mention of how these collected revenues themselves are even allocated. You did mention spending on education in Canada, however, to illustrate… “something.” You would do well to take a look at math, reading, and science scores relative to spending on American education over these last fifty years.

        I am happy you appear to be prospering but you are a foolish girl to harbor that degree of resentment. While you are proficient in populist layman rhetoric, you are vastly ignorant of economics, finance, and government function.

        You clearly resent the bar stool economics parable. Unfortunately, resentment alone is not an argument against it. Nor is an appeal to popularity a viable means for establishing facts or scientific thought.

        Reply
  • 6-years late to this table: I respect where Bridget is going with this, but I’m still a fan of Barstool Economics.

    I’m one of the “stupid rich” … by someone’s measure. A one-percenter, to use a different metric. Or the “tenth man” at the Barstool. I’m what you call “old money.” So I am going to inject a coupla thoughts here.

    The Barstool Economics supposition is purely mathematical, and it is (was) accurate at the time. Is it an over-simplification? Yes. Does it exclude some real-world motivations and forces? Absolutely. But it is fundamentally accurate. At its core, it espouses what I experience when I’m feeling overtaxed.

    As with all philosophies and principles, a nutshell-account is going to be over-simplistic. Allow me to speak for myself as a “tenth man” at the bar.

    My taxes are paid to the Government. Any notion that “I own the bar” or “I own the brewery” is akin to “I own the country.” Lord knows I do not own the country. Quite the contrary, in fact. In my particular situation, I reside in the deep [political] minority for the community in which I live. Hence, I have no vote for where, when, or how my tax money is spent. It is taken from me, and that is that. Feels very much like “taxation without representation.” For all you nitpickers … yes, streets DO occasionally get re-paved. Schools DO get funded. Law enforcement does (in theory) preserve law and order. ATC operates. Et al. Yet any notion that I get remotely commensurate returns from my annual taxes is patently false.

    How about this simple but tasty example: I absolutely detest the fact that ANY of my tax money goes to providing a lifetime Secret Service detail for the 45th President of the United States. This is but one minutial illustration of how my substantial taxes get used against my wishes. Multiply that to the scale of mis-deployed military resources … and suddenly I have an axe to grind.

    In this Great Experiment of 1776, America does have citizens who are under-privileged. Wage-inequality exists and harms the equation. People get down on their luck. Or get laid off. Or disabilities. Or whatever. They’re in trouble, and they need help from their fellow Americans.

    I feel an obligation to pay higher-than-proportional taxes to compensate and provide for those who cannot provide for themselves. Unlike Donald Trump and other extreme earners, I have no avenues through which to shelter my income. When the math is all said and done, combining all forms of taxation, I easily pay north of 60% of my income. Easily.

    Digression: When Donald Trump pays $750 in annual taxes YOY, everyone is up-in-arms and calls him a thief, a cheater, and myriad expletives. Justly so, imho. When someone like me actually pays >$500k in annual taxes, I’m the opposite. I’m the “fool” … as in, “A fool and his money are soon parted.” -Tusser.

    My point. I pay taxes for the millions-upon-millions of citizens who cannot or do not pay for themselves. At a certain level of taxation, THIS IS AN ACCEPTABLE CIVIC DUTY and I am happy (yes, happy) to pay my enhanced share. There comes a time, though, when the “tenth man” says enough is enough. When taxation rates escalate over-the-top, and the tenth man leaves the table. Decade-over-decade, the tax-and-spend Liberals take us ever-nearer to this breaking point. And then the Republicans bring us back.

    The thrust of the Barstool Economist really is spot-on. Yes, it excludes the mega-riche … the Warren Buffets, Larry Ellisons, et al. The capitalized on US Capitolism, made HUGE contributions to employment, corporate taxes-receivable, and broad services to the world public. When America becomes too corporation-hostile, too wealth-hostile, the nation will collapse as the “tenth-men” leave the building. For America, that day IS coming … a fact which I often lament.

    I want to leave y’all with this little off-topic nugget; as it pertains to the human condition. Two parallel scenarios by which money gets FROM my pocket and TO a worthy cause. Let’s take Planned Parenthood, for example … (just to add a little polarization to the example. All you pro-lifers just need to pretend that Women’s Reproductive Rights are a good thing.)

    1) The government increases tax rates and takes more money from me. The inefficiencies of bureaucracy take their cut, and a certain remainder goes to the cause-du-jour. (In this case, Planned Parenthood.) I pay higher tax rates for which I have no say … grumble, grumble. I don’t even know if my money gets to Planned Parenthood. My human experience is a negative one.

    2) The government decreases tax rates and I am left with more discretionary income. I approach Planned Parenthood and make substantial charitable contributions to them. I get the enormous gratification of supporting women’s reproductive rights. Planned Parenthood sees the happy face of their supporter. The net human experience is a positive one.

    Summary bullet — Tax-and-spend Liberalism (as a gross generalization) leads to a reduction in the human experience; by fleecing the wealthy, by dismotivating them to earn, by relieving the under-privileged of the desire to strive toward personal betterment, by relieving citizens of their inborn quest for self-sufficiency. Et al.

    Sub-nugget in parting: Note the historic collapse of recent Socialist structures. When the Berlin Wall fell, how many people were actually scrabbling to get INTO East Germany? Few, if any. When the Iron Curtain fell, how many Soviets recoiled INTO their Socialist spheres. Few, if any. The socio-economics of America’s distant future are precisely what today’s humans are scampering to avoid. Chew on that one.

    O, Canada.

    Reply
  • Bridget — Love ya! — Troy

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