The Myth of Barstool Economics

Facebook has seen versions of this video floating around recently. It's a cute little story about men drinking beer in a bar, something we can all sympathize with, and it tries to make a larger statement about how "unfair" our tax system is and how we shouldn't stigmatize inequality.

Now, for anyone that's spet even a little time looking at the tax system, something seems a little off here. What's more, the Facebook version of this story, often posted in the form of a letter, is always attributed to American economists who deny having anything to do with it. Clearly, these guys wouldn't spend so much effort distancing themselves from this obviously partisan tale if they actually believed in what it says.

As the incredible Richard Wolff points out, part of the deception in the video is its simplicity. Viewers often drop their critical assessment of its content because it both seems straightforward (look at the easy math!), and it supports a common sentiment (taxes suck!). But if you only take it this far, you miss an incredibly pernicious piece of political economy.

Debunking all of this is going to take some work, and I'll be relying on the basic messages that Wolff presents, filling in details as we go.

i) While the "barstool economics" story assumes that everyone is getting the same service (a beer), the truth is that the rich receive more benefits from the government than the poor, which is why they should pay more. The tax code is just one of many examples.

ii) The original point of the income tax, as it was conceived in the beginning of the 20th century, was to use the money from the top 1-5 percent to develop common well being. The sentiment is very similar to Adam Smith's take on taxes, that those with the most should provide the most to guarantee a strong civil society. This is basically described in the original legislation. 

Over the last 50 years, the rich have been steadily moving the tax away from themselves and onto poorer people, which helped turn people against it. This is part of the reason that anti-government rage seems to only grow stronger the longer Republicans are in office: by shifting the cost of government onto

iii) The story is confusing for people who don't understand that we have a marginal tax system. You do not pay a tax rate on a total amount of money. You pay rates for certain increments that you earn.

For example, the first 10k are tax free. The next 10k are taxed at 5 percent. The next 10k at 10 percent and so on. The rich only pay the top rate on the money that they've earned above 250,000k; the lower increments are taxed at the same rate as the poor and middle class. As it works out, your effective (actual) tax rate is always lower than the tax rate of your top marginal bracket. This is why no one in the US actually pays 35 percent (the top threshold), even before accounting loopholes come into play.

So if Barack Obama is going to keep the Bush tax cuts for everyone except those "earning over 250k," what he's actually doing is adjusting the rate for the very top threshold. Rich people will still get a tax reduction for everything they earn up to 250, only the amount that comes over the top is actually taxed higher. Does that make sense?

To play the game a little, Obama's plan would be similar to this scenario:

Guys 1-6 no longer have to pay due to the cut. Every one else shares a four dollar tax cut, which is the maximum reduction that anyone would receive. Although everyone shares the cut equally, the richest guy now pays a larger portion of the bill, since some other guys have dropped out. This is true of the "discount" given in the story too, and it would happen in most scenarios that try and distribute the discount fairly.

(This demonstrates the great irony of the right's tax cutting zeal. Half of Americans don't pay income taxes because Republicans have been cutting taxes so aggressively for the last thirty years. Having created this situation, they now complain about it to further their real goal, lower rates on the rich and higher rates on the poor).

iv) In the end, the biggest problem with barstool economics is how incredibly far it is from the actual kind of tax cuts proposed by the Republican Party. Under the story's little description of a "tax cut," everyone got roughly the same savings, in percentage terms. In fact, the "percent" cut actually favored the poor.

No Republican is actually proposing anything like that. If you compare Romney and Obama's plans (assuming that Romney could actually deliver, which is a whole 'nother issue), you can calculate the "Romney saving" by combing the two together.

Graph original prepared by Ezra Klein here.

Excluding the poorest twenty percent (who would see their taxes increase), all of the bottom 99 percent would get a tax deduction of less than ten percent (comparing with the rate they'd have under Obama). The top one percent, would get a 13 percent tax deduction, while the top .1 percent would get a 15 percent tax deduction.

So, people aren't just confusing dollars and rates when they look at Republicans' tax cuts. The rate of the cut for the rich is way larger than the rate of the cut for everyone else. Combined with reduced services, you see a massive shift in the burden of government from the rich to the poor.

...And they blame the left for class warfare.