The Barstool Economics Parable is A Fairytale

10 Comments

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 Story is as follows:

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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10 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.

    Reply
    • “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.

    Reply
  • 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.

      Reply
      • 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

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