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Wednesday, March 23, 2011

Bar Stool Carbon Tax Economic Modelling Explained

"Bar Stool Carbon Tax Economics at work in Australian Economics Modelling – 

The Australian Government is proposing an additional taxation cost on Australian businesses for the purposes of taxing the carbon economy. The Government have promised that money from the tax will go back to helping businesses adapt to the new economy and to compensating low income families.

The following is a graphic example of how this type of economic modelling works in practice.



The following has been Adapted by Michael D. Robinson from
“Bar Stool Economics by David R. Kamerschen, Ph.D”
(With my apologies to David R Kamerschen for what I've done to his original piece.)


When you are in the poor end this sounds great, but how many people are trying to start businesses in Australia and get to the top end, or develop existing Australian companies and businesses?
Calculating this like the carbon taxation economics model it gets worked out somewhat like this.

Read this and see if you think that the Carbon pricing model being proposed still makes sense. Whether this is right or wrong it bears considering in my view.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we are being told we should pay the carbon tax on everyday items it will go something a little like this.Bar Stool Carbon Taxation Economics Explained.
The tenth man to arrive at the bar employed the other nine, so he offers that they all pay what they can and he'll cover the rest of the bill. Feeling generous he doesn't mind paying a little bit more for his employees so the daily drinks after work becomes a regular thing in the men's lives, in fact it almost becomes a necessity as part of their community structure and daily lives.
When the bill arrives at the end of the night the first four men (considered poorest) would pay nothing. The cost of their drinks is normally paid for by business (ie the boss who pays their wages, provides them with an income, and now pays for some of their drinks at the end of the day).

The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest, and in this example the Australian producer being taxed for ) would pay $59.

Note 7 out of the ten men pay below the average cost of $10 for the night out. It sounded like a good arrangement to all so, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the carbon tax came into place and changed everything. There was going to be a $20 fee for large groups (aka the carbon economy tax / levy / fee) for taking up space in the bar but in return if they had ten customers they would get a luxury booth and special treatment. The men felt important, they no longer were like everyone else, they were setting a trend and doing something better than everyone else. Although the bar owner charged the group the $20 fee, but the bar manager also saw that this group were good customers so he ( a.k.a. the government's compensation plan) decided to give back $20 in compensation to the group reducing the cost of their drinks.

The boss decided to not tell the men of the additional cost of the private booth as he wanted them to enjoy the rewards of working hard and he thought it wasn't really that much anyway, the men will appreciate what he's done for them. So he doesn't tell them about the $20 a night additional fee which he pays each night in advance.

All the men know is that because they are good customers the manager is going to reduce the cost of their daily drinks by $20. So instead of a round of drinks costing $100, all get to share $20 compensation. They start to think they will all be compensated around two dollars each....on average, but then it gets discussed that the compensation should be according to how much they are spending.
The group still wanted to pay their bill the way we pay our taxes so each night the boss quietly covered the $20 group table booking fee for the next, and still the first four men were still unaffected. They would still drink for free. They drank as much as they always did, it didn't cost them any more and it didn't cost them any less so it didn't change their drinking.

But what about the other six men? The ones actually paying the final bill at the end of the night? How could they now divide the $20 windfall compensation so that everyone would get his 'fair share?' The boss didn't mind covering the $20 group fee because he figured that it would get the majority of that back since he was paying the majority of the bill.

But after a while the men discussed this and realized that $20 divided by six is $3.33 and they should all share in the compensation being paid back to them as they were all being regular customers. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer, and that wasn't popular because no one else was being paid to drink their beer, not even the poorest in the group.

So, the bar owner (the government's carbon economics advisory group) suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

The fifth man, like the first four, now paid nothing for their drinks (100% savings). They were FULLY COMPENSATED and were very happy with the arrangements.

The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before, except the boss who despite getting compensated $10 had still paid an extra $20 but he didn't mind as he enjoyed spending time with the men at the end of the day they were getting good value for the extra $10 it cost him.

***In reality the $20 booking fee equates to the extra costs business carry in these sorts of regulations.

This continued for some time until some of the men realised that the boss was getting back $10 and none of them were getting back anything like that and they began to be disgruntled.

As the men began to compare their compensations from the loyalty discount compensation program they started to work out who was benefiting most from from the $20 discount....the boss.

'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth man, their boss saying' but he got $10!'
'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too.

It's unfair that he got ten times more than I got' 'That's true!!' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get anything back at all. You all at least got back something from the $20 extra compensation that was a group thing for us all but we got nothing. The system exploits the poor!'

The next day the boss closed his business deciding that he didn't want to continue under these circumstances. He went to another country to work with people who would appreciate what he was doing for them.

That night when the remaining 9 men arrived for drinks they agreed that they would continue their nightly ritual despite being out of work because even though the boss had left there were still nine of them and they got a good discount at the end of the night so it was worth continuing the arrangement, so the nine sat down and had beers without him.

When it came time to pay the bill, they discovered something important about the reality of their situation.

Between them they had just over $30 which is what they had paid ever other night but because there were nine of them and the big spending boss was no longer a part of their group, they weren't going to get the $20 bonus they usually got so the bill came to $90.
To make it worse if they wanted the private booth in future nights they would have to pay $20 up front as well.

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes may get some benefits from it, but at some point they decide it is just not worth it and they go elsewhere. Tax them too much, attack them for being wealthy, charge them too many fees and levies and they just may not show up any more. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier and when they do, it isn't just the nine remaining men who loose out, the “bar” looses as well.



The above has been Adapted by Michael D. Robinson from

For those who do not understand, no explanation is possible.


If you don't think this is real stuff look at what these credible big businesses are talking about, dumping $1BN dollars of construction in Australia and taking business elsewhere!!!!!!

Bluscope steel slams Australia's Carbon Tax …. the bosses are just saying, the business will go elsewhere!

 has lost trust in the Gillard Government and that any proposed compensation scheme for emissions trading was like "putting a bandaid on a bullet wound."Meanwhile, 
Mr Kraehe, who is Bluescope Steel Chairman, said the carbon tax was ill considered and wouldn't give businesses enough time for consultation.

- End.


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