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.