More About Bar Stool Economics

After misunderstanding the Bar Stool Economics story, I’ve thought about the issue some more.

At first blush, the story is astounding. One group pays 59% while five other groups only have to kick in 1%! To gain a better understanding I played with the numbers and got some basic results. Using a flat tax I generated generic income data for 10 aggregate groups as in the Bar Stool “lesson.”

With a linear distribution of wealth, the top group (10) made 10 times as much as the lowest earning group (1). In this case, the highest earners made 18.18% of all the money and paid 18.18% of all taxes (using the flat tax to simplify the calculations) while the poorest group paid only 1.82% of all taxes.

Whenever we use an exponential distribution of wealth using a growth factor of 2, we get results that are very similar to the Bar Stool’s numbers. Whenever the top grossing group outpaces the poorest group by a factor of 512 (29), the highest earners receive a shade over 50% of all income. In this case the lowest five groups make roughly 2% of all the income. Rounding to the nearest dollar, we see that the lowest four groups would basically drink for free.

The Bar Stool Economics story confused me. Now I understand that it is actually a profound musing on the distribution of wealth in America. Simply reduce the gap between rich and poor and no one will have to pay too much ;–)

Just kidding. Clearly, the disparity between the rich and poor is enormous. For example, CEO of Exxon, Rex, makes 16M a year from the company; the guy at Burger King will make about $13K a year. That’s a difference of 123077%. That’s not unfair; I want in on that gravy train too! But it makes sense that the highest earners will pay the largest percentage of taxes because they make the largest percentage of wealth.

The problem exposed by the Bar Stool Economics story is the progressive nature of the American tax system is unfair. The highest earners are paying a huge percentage of the taxes; as the Hive Mind tells us “…the top 1% with gross income of $328,049 or more pay 36.9% (earning 19%)…” A flat tax would be a much better system.