(Reality) Check, Please: Why the Restaurant Tax Analogy Doesn’t Work
There’s an analogy about the nation’s tax structure that involves several people who make different amounts of money splitting the check at a restaurant. The analogy purports to explain why a progressive tax structure is unfair. It tries to convince us that a tax break that sends 90% of benefits to the top 10% of income earners is perfectly fair. And it seems to make a lot of sense. Listen to the analogy without thinking about it much, and you’ll probably be okay with tax breaks for the wealthiest people in the world. The problem is, the analogy is completely false.
Here's an Amusing Video of a Guy Repeating this Dishonest Analogy
Here’s the Analogy
Suppose a group of ten people all gathered together at a restaurant every week for dinner. Suppose further that they had decided that they would split the check according to their incomes, with the person who made the most money paying the most, and the person who made the least money paying the least. To make the math simple, we’ll assume that every week, the dinner bill for the ten people comes out to an even hundred dollars. The people split the check like so:
--the first four, with the lowest incomes, paid nothing;
--the fifth paid $1;
--the sixth paid $3;
--the seventh paid $7;
--the eighth paid $12;
--the ninth paid $18;
--the tenth person, with the biggest income, paid $59
They continued in this arrangement for many weeks, until one day, the restaurant manager visited their table to deliver the check himself. He told his ten guests, “You folks have been great customers, and we appreciate your continued patronage. To show our appreciation, I’m going to knock $20 off the price of your meal. I’ve already worked out your individual payments, according to your original agreement.”
The payments worked out like this:
--as before, the first four people paid nothing;
--the fifth person now paid nothing instead of paying $1;
--the sixth person now paid $2 instead of $3;
--the seventh paid $5 instead of $7;
--the eighth paid $9 instead of $12;
--the ninth paid $12 instead of $18;
--leaving the tenth with a bill of $52 instead $59
Every person was better off than before, but after leaving the restaurant, they all started comparing their savings.
“Hang on a sec,” says Number 6, “I only got a buck out of the $20 reduction, and he got $7!”
“Hey, you’re right!” says Number 5. “Why should Number Ten get seven times what we got?”
“Yeah, I’m with you guys,” says Number 7. “Number Ten got more than double what I got.”
And One through Four chime in, “And we didn’t get anything at all! No fair!”
To make his dining companions feel better, Number Ten divides his $7 savings amongst the group, leaving each person (except Number Ten!) with $0.70 more of refund money.
The following week, Number Ten didn’t show up to the dinner group. The remaining nine people sat down to dinner as usual. But when the check came, they discovered that they were now $52 shy of paying their $80 bill.
And that, friends, is why the wealthiest taxpayers benefit the most from a tax cut: they pay the most in taxes. Tax them too much, punish their success, redistribute their wealth, and they just may not show up at the table anymore.
Seems to Make Sense, Doesn’t It?
After reading this little story, I bet you’re all indignant that anyone would see anything wrong with a tax cut that benefits the rich more than it benefits the poor. The poorest folks don’t pay taxes in the first place, so why should they get money when there’s a refund? To get a refund, you had to have paid something in the first place, right? Right. And if you pay ten dollars and someone else pays a hundred dollars, and you both get 10% back, it’s only right that you get a dollar, and the other guy gets ten, right? Right.
If America really worked like that imaginary restaurant where the bill always comes out to an even hundred dollars and billionaires sit down to eat once a week with unskilled day-laborers, it would be perfectly just for Number Ten to get $7 when Number Five gets only $1. But this analogy depends on many unspoken assumptions that are not true in the real world.
Assumption #1: All the People are Eating the Same Meal
Since the analogy purports to be only about our tax system (and by association, what we all get for our tax dollars), we’re assuming that all ten people are getting the same meal. In the real world, you’d be a fool or else deliberately obtuse to assert that the wealthy and the poor enjoy comparable lifestyles, but we’re not talking about things like goods and services that we get in exchange for our money (like a new Cadillac as opposed to a used Chevy). The analogy is more about the differences between the rich and the poor in America, and how the mere fact of being one or the other impacts your life in ways that most of us never even consider.
The meal represents things like Defense, Social Security, the Interstate Highway System, the National Parks, farm subsidies, Food and Drug Administration, Federal Aviation Administration, Federal Bureau of Investigation, and so on. But it also represents—and this is very important to understand—the quiet little differences between the rich and the poor in America. Yes, it’s about what the government uses our tax money to do for us, but it’s also about what the rich get simply by being wealthy—not what they get when they spend their wealth, understand, but what they get merely for having it. These differences are rarely talked about, difficult to measure, and by accident or by design, many of them are self-perpetuating.
Assumption #2: All the People are Ordering From the Same Menu
The analogy assumes that the bottom four people have all the same options available to them as the top person has. As mentioned, this is not about being able to afford luxuries; this is about options available to a person in our society. Take a look at public schools, for example. (No, this isn’t going to become an argument for or against public schools; I’m using them only as an example.) They’re meant to be giving the same quality of education to everyone who attends them, right? But they don’t. Whether you love public education or hate it, it remains a fact that poor inner-city and rural districts have to make do with less, because they are funded by taxes raised from the residents of those districts. Wealthy suburban districts, in contrast, have state-of-the art (or at least, adequate) facilities, plenty of (or at least enough) materials for each student, and attract the best teachers because they pay higher salaries. How do you get your kids into one of those wealthy suburban school districts? You have to live there. How? Buy a house there. How? Well, for the most part, you can’t.
Of course a person with a below-average income can’t afford to buy a five-bedroom home in, say, Grosse Pointe Shores, Michigan. It’s too expensive. Maybe he could afford a two-bedroom home in Grosse Pointe Shores, but that point is moot: there aren’t any. Those wealthy suburbs don’t generally approve development plans that include housing that people of modest means can afford. Further, it’s actually against the zoning ordinances to build a modest home that a person with a modest income could afford. The poor are being systematically denied access to the level of education that the wealthy take for granted. This is just one example.
In a more accurate analogy, the bottom half of the group would have a certain number of choices, and each customer up the economic ladder would have a progressively wider array of menu options.
Assumption #3: All the People are Eating at the Same Table
In the restaurant analogy, it’s assumed that since the ten diners are sharing a check that they’re sitting at the same table. But in the real United States, billionaires do not usually dine with day laborers. As mentioned above, they do not live next door to each other. For the most part, they don’t even live in the same towns.
A wealthy suburb can usually prevent a dirty incinerator or power plant or chemical factory from being built nearby, even if the thing is necessary to the greater metropolitan area. (This is often referred to as NIMBY, or, Not In My Back Yard.) But poorer areas are less able to prevent such facilities from being built in their collective backyard, and when built, those facilities become a mixed blessing at best. Perhaps they provide jobs for the nearby residents (hazardous, unhealthy jobs, to be sure, but jobs), but they also have a negative effect on public health and they drive down property values. Thus, even if a poor person manages to save enough money to buy his way into a cleaner neighborhood, his home will likely be worth less than when he bought it (this is even more true thanks to the housing crisis), and moving will be a less than viable option, even if he’s never missed a mortgage payment.
If the restaurant analogy matched the real world more closely, the wealthiest diner would have a great table near a window, perhaps with a strolling violinist making the rounds every now and again, while the poorest diners would have seats by the restrooms, next to the kitchen, near the bar or in some other high-traffic area. Their tables would be crowded together, and their chairs would get bumped every now and again as someone squeezed past. Perhaps they’d be seated right under the air vent, and would have to deal with a continual flow of frigid or overheated air, depending on the season. They can ask to move to a better table, but the maitre d’ knows that they’re not lucrative customers, so no table will be forthcoming.
Assumption #4: All the People get the Same Quality of Food
Even if you allow for the ten diners in the analogy to be ordering different selections from the menu, the analogy assumes that the food is all going to be cooked to the same standard of quality. If Number Ten orders the same chips and salsa appetizer, burger and fries entrée, and tiramisu dessert as Number Three, those two meals will be as alike as possible in Analogy World. But we don’t live there.
Even the water that comes out of the tap in your house will have a different level of quality, depending on whether you’re wealthy (and live in a wealthy community) or not (and live in a less than wealthy area). The Environmental Protection Agency is meant to keep people and corporations from polluting the country’s groundwater, but alas, the EPA doesn’t protect poor rural citizens with the same zeal as it does wealthy suburban citizens. Many of us know about Pacific Gas and Electric’s deliberately negligent pollution of a rural water table from the movie Erin Brockovich. That story has a happy ending, but there are many others which haven’t yet ended. You would think that the EPA would be all over a corporation that taints the drinking water of American citizens. If those citizens live in a wealthy suburb…well, chances are the water wouldn’t be polluted there in the first place. NIMBY, remember? And the rural poor don’t have much political clout.
The same is true of poor urban neighborhoods, which are much more likely to be downwind of a pollution-belching power plant or factory. Sure, the factory or power plant provides jobs, but it also provides asthma, emphysema, higher concentrations of heavy metals, heightened allergy symptoms, and so on. In the real world, the rich and the poor don’t even get the same quality of air, let alone the same quality of food or water.
A more accurate analogy would mention that the wealthiest member of the supper club would be certain to get an unadulterated meal, entirely free of foreign matter. The folks on the bottom end of the scale, on the other hand, would be eating food that had stuff other than food in it, from insect parts or human hair to trace amounts of lead or other toxic chemicals, up to and including to dioxin. And we haven’t even talked about the quality of service yet.
Assumption #5: All the People get the Same Level of Service
In the Analogy Café, we tacitly assume that when any of the diners wants a refill on their cup of coffee, they get it. If a diner orders a burger, he will get a burger. If he specifies a cheeseburger, medium-well, his burger will have a slice of cheddar on it and be medium-well done when it arrives at the table. It will arrive hot, and if the diner has a problem with the meal, he can have it fixed at no extra charge (like you can at a real restaurant). The server will make suggestions about which wine or which side dish will go well with the entrée, and may even bring a dessert cart around (depending on how snooty the restaurant is). But that’s not how things work in the real U.S. of A.
We pride ourselves on being a land where everyone is assumed to be equal under the law, but that’s not how we get treated in practice, by the government, or by society in general. But we’re also talking about what we get for out tax dollars, so let’s concentrate for a moment on how the government treats wealthy people differently from poor ones.
A great example of this kind of different treatment of the wealthy and the not-so-wealthy is in food services. I’ve talked about this double-standard in other articles, so I’ll sum up here: a wealthy corporation can sell tainted food that kills people, and be allowed to continue selling food, but an independent entrepreneur who tries to set up a business that delivers wholesome, fresh, locally-grown produce to its customers (and has never even given anyone a case of the runs, let alone caused a death) will get shut down by a government agency. Yes, in the USA, the wealthy can (accidentally, to be sure, but still) kill several people in the course of selling food and still be allowed to continue selling food, while the less-wealthy, who have never even made someone sick in the course of selling food will be stopped from selling food (presumably as a preventive measure?).
Corporations are also able to get away with polluting, and there’s not much someone who lives downstream can do about it. A wealthy citizen can move with relative ease, or hire an attorney to defend his property rights. A poor citizen (who may already have to decide between eating and heating) can’t hire the attorney unless he can convince one to work pro-bono, or for a percentage of any judgment won in court. If the poor citizen can get an attorney to take his case, or if he files the proper legal documents on his own, he will then face the possibility of a SLAPP (Strategic Lawsuit Against Public Participation) suit. These are filed by corporations against citizens who try to assert their rights to clean air, clean water, and so forth (thus making it harder for the corporation to continue polluting or otherwise doing whatever it wants to do). The SLAPP suit takes up the citizen’s time and money, forces him to take time off from work (often unpaid) for court appearances, and otherwise makes his life as inconvenient as possible. Then the Corporation says, “Hey, Mr. Citizen, we’ll drop our frivolous suit against you if you’ll drop your serious one against us. Or you can keep on with your suit, and we’ll ruin you with legal rigmarole. We can afford this fight. Can you?”
The wealthy can figuratively wall themselves off in suburbs with zoning laws to prevent affordable homes from even being built there, and can literally wall themselves off in gated communities, whereas the rest of us must suffer salespeople and evangelists and even the FBI to wander around our neighborhoods and put us under warrantless surveillance. No problem, you might say, but the US 9th circuit court has ruled that if your car is parked in your driveway, and there is no barrier between your driveway and the rest of the world, then the FBI does not need a warrant to put a tracking device on your car. Think about that for a moment. Who is likely to have a barrier between their property and the rest of the world? Not you and me, that’s certain. No, it’s the wealthiest people who build fences around their estates. If you’re not a homeowner, forget about privacy; your car will be parked on a semi-public lot. There is no “reasonable expectation of privacy” (in the 9th Circuit’s words) in a parking lot. Never mind that most reasonable people in the USA do not expect to have their every movement followed by a government agency. In certain other countries, at certain other times in history, perhaps. But not in the modern United States. There are other, more subtle, ways the government discriminates against the poor. One of them is in the way a poor person is blocked from going into business for himself.
I’ve already mentioned the case of a regular citizen of middling income whose food delivery startup was preemptively shut down, but there are other, more widely applicable differences. A higher-income person usually has a college degree, and their job usually involves paperwork, data, and documentation in some way rather than physically building or repairing objects and charging for those goods and services. When a high-income-earner loses a job, he can (relatively) easily set up as a consultant, providing to all comers whatever service he once provided for his employer, and charging a fee for service rather than drawing a salary. Since his work is such that it can be performed nearly anywhere without anybody noticing or caring, he can easily run his new enterprise from his home, without renting a storefront, furnishing it as an office, and driving to it every morning to do his work. A lower-income-earner, on the other hand, is usually involved in providing a different kind of service, like bringing food to tables at a restaurant, for example, or cutting hair, or building furniture to be sold in a store. If a hair stylist, say, gets laid off from his job at a Fantastic Sam’s, he cannot legally set up shop as an independent barber at his home.
Even if he owns his home and has all of the facilities required by the health code in it, owns a barber chair and other necessary equipment, and is willing to have people come into his living room to have their hair cut, he is not allowed to run a barber shop from his home. He must rent a storefront in an area zoned commercial (an expense the higher-income-earner does not have), must travel there to conduct business (another expense the higher-income-earner does not have), and must pay these expenses whether or not anyone comes to have their hair cut. This is very important: even if he owns his home, the tradesman may not use his home as a place of business without breaking the law. And you can forget about the independent woodworker meeting a customer at a coffee shop to conduct a sale, as independent high-income-earners often do.
Finally, many kinds of entrepreneurship are actively suppressed by the government. The folks who wash car windows on street corners, for example, are treated as criminals rather than people performing a service in the hope of a tip. The same is true of buskers (street performers). Oh, they can play their music, juggle their beanbags, or whatever, but if they put out a tip jar, dun dun duuuuun: they’re criminals. Yes, it’s legal to play music on the sidewalk, but it’s illegal if you make an unspoken request for a bit of coin from folks who enjoy your performance.
If we want the Analogy Café to more accurately reflect American society, the bottom four or five earners would routinely get food they didn’t order, or food that was not prepared to order. They would wait forever to get a refill in their coffee cups, they would have hot soup spilt on them without apology, and their meals would often arrive at the table ice-cold. If they were to complain about the coldness of their meal, they might, maybe, get their meal re-heated in a microwave. If they were to try to do something on their own to heat up their meal (hold it over the candle on the table, perhaps) they’d be kicked out of the restaurant. The top earner, on the other hand, would often get little extras—a complimentary glass of wine, perhaps, or free dessert. If his order were botched in some way, the meal would probably be comped entirely. If he happens to have forgotten his wallet, no problem. The manager will happily extend credit (interest free!) until Diner Number Ten can return at his own convenience with payment.
Assumption #6: Nobody is Leaving a Tip
In the restaurant analogy, the only money mentioned is the money on the bill--that is, the money due for the food and drinks. No mention is made of any gratuity. This is actually the most dishonest part of the analogy. Consider: as you may know, when you have dinner at a restaurant (at least in the US), it is customary to leave a tip of between 15% and 20% of the bill, depending on how happy you are with the service. And as we all ought to know, the income tax is not the only tax Americans pay. We also pay a national tax on gasoline, which is an excise tax. It doesn't matter how much you make, you pay the gas tax at the same rate per gallon (which means the least wealthy pay the greatest percentage of their income). There are also the Social Security tax, which is only paid on the first $100K or so earned, and the Medicare tax, which is paid at the same rate regardless of income. Then there are corporate taxes, which even conservatives agree get passed on to the end consumer. The bottom five diners aren't a bunch of deadbeat freeloaders, as the analogy would have us believe. They are contributing.
For the analogy to be more honest, it needs to point out that all of the diners, regardless of how much of the bill they pay, regardless of their income level, kick in about two or three bucks for a tip. Further, we need to point out that they're still kicking in the same two or three bucks even though the actual bill is $20 less than it used to be.
Punishing Success? How About we Stop Rewarding Failure?
The main argument against a progressive tax system is this: progressive taxes punish success. (They don’t, really, but that’s the argument.) It’s really hard to listen to such an argument without thinking of the many many ways that in the top income brackets, failure is rewarded. We can’t talk about the difference between the rich and the poor without discussing the different treatment the two groups get when they lose a job. It’s true that when the average worker loses his job due to lack of work, he can apply for unemployment (which will give him a small income to cover his bills while he searches for another job). But if he loses his job because of bad performance (is “dismissed with cause”), he can forget about any help from the state. What’s more, he’ll have a heck of a time trying to get a new job. Compare this to what happens when one of our top earners gets ‘dismissed with cause.’ You all know what happens when a CEO runs a company into the ground, causes the stock price to drop, and makes necessary hundreds of layoffs, right? He loses his job, sure, but he also gets maybe a year’s severance pay, and sometimes gets a seven-figure (or more!) lump sum payment. I suppose this is meant to be a punishment for poor job performance? Let me put this in a bit of perspective: if a minimum-wage janitor who did a terrible job cleaning the building were to be given the same treatment when he was fired (adjusted proportionally for the difference in pay) he’d get a $296.00 check from his former employer once a week for the next two years, in addition to a lump-sum payment of about $15,000. And all of this would be for doing his job so badly that the company would rather have someone else doing it. Pretty harsh, right? Heck, if that’s what happens when someone fails at their job, why the heck would anyone even try to succeed?
So the next time somebody pulls out the Restaurant Analogy to justify a tax cut for the top income earners, or to support an argument for a flat tax, or otherwise imply that the poor get a free ride and should get off their lazy butts and just stop being poor, you’ll be more able to explain why they’re wrong.
A look at cause-and-effect from an economist's point of view.
Haven't read this sequel yet, but I look forward to doing so.
An examination of causes, effects, and unintended consequences.