Suppose that
once a week, ten men go out for beer and the bill for all ten comes to $100. If
they paid their bill the way we pay our taxes, it would go something like this…
The first 4 men
(the poorest) would pay nothing.
The 5th would
pay $1.
The 6th would
pay $3.
The 7th would
pay $7.
The 8th would
pay $12.
The 9th would
pay $18.
And the 10th man
(the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every week and seemed quite happy
with the arrangement until, one day, the owner caused them a little problem.
"Since you are all such good customers," he said, "I'm going to
reduce the cost of your weekly beer by $20.” Drinks for the ten men would now
cost just $80.
The group still wanted to pay their bill the way we pay our taxes.
So the first four men were unaffected. They would still drink for free but what
about the other six men? The paying customers? How could they divide the $20
windfall so that everyone would get his fair share? They realized that $20
divided by six is $3.33 but if they subtracted that from everybody's share then
not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his
beer.
So, the bar owner suggested that it would be fairer to reduce each
man's bill by a higher percentage. They decided to follow the principle of the
tax system they had been using and he proceeded to work out the amounts he
suggested that each should now pay.
And so, the fifth man, like the first four, now paid nothing (a 100% saving).
The sixth man now paid $2 instead of $3 (a 33% saving).
The seventh man now paid $5 instead of $7 (a 28% saving).
The eighth man now paid $9 instead of $12 (a 25% saving).
The ninth man now paid $14 instead of $18 (a 22% saving).
And the tenth man now paid $50 instead of $59 (a 15% saving).
Each of the last six was better off than before with the first four continuing to drink for free.
And so, the fifth man, like the first four, now paid nothing (a 100% saving).
The sixth man now paid $2 instead of $3 (a 33% saving).
The seventh man now paid $5 instead of $7 (a 28% saving).
The eighth man now paid $9 instead of $12 (a 25% saving).
The ninth man now paid $14 instead of $18 (a 22% saving).
And the tenth man now paid $50 instead of $59 (a 15% saving).
Each of the last six was better off than before with the first four continuing to drink for free.
But, once outside the bar, the men began to compare their savings.
"I only got $1 out of the $20 saving," declared the sixth man. He
pointed to the tenth man, "but he got $9"
"Yes, that's right," exclaimed the fifth man. "I
only saved $1 too. It's unfair that he got nine times more benefit than
me"
"That's true" shouted the seventh man. "Why should
he get $9 back, when I only got $2? The wealthy get all the breaks"
"Wait a minute," yelled the first four men in unison,
"we didn't get anything at all. This new tax system exploits the
poor" The nine men surrounded the tenth and beat him up.
The next week the tenth man didn't show up for drinks, so the nine
sat down and had their beers without him. But when it came time to pay the
bill, they discovered something important - they didn't have enough money
between all of them to pay for even half of the bill.
And that, boys and girls,
journalists and government ministers, is how our tax system works. The people
who already pay the highest taxes will naturally get the most benefit from a
tax reduction. Tax them too much, attack them for being wealthy and they just
might not show up anymore. In fact, they might start drinking overseas, where
the atmosphere is somewhat friendlier. David R. Kamerschen, Ph.D.
Professor of Economics.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible
This a great blog post and an entertaining read, funny but very true and this how people look at tax breaks and the media often represents such moves as only benefiting the wealthy.
ReplyDeleteEmma Simpson // cheap accounting