January 21, 2010

How Taxing works

Why is it that anytime there is the suggestion of lower taxes it is viewed as “Helping the rich”?

Suppose that every day, ten men go to the bar, and drank exactly $100 worth of beer among them. If they paid their bill similar to how you pay taxes, the breakdown would be roughly as follows:
The first four men (the poorest) would pay nothing.
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) would pay $59.

So, that’s what they decided to do.

The ten men drank contentedly together in the saloon bar until the barkeep, meaning to be helpful, presented them with a dilemma.

“Gentlemen,” he said, “you’re my best customers. To show you how much I appreciate your patronage, I’d like to give you a discount. From now on, I’ll knock $20 of the total bill for your drinks”.

Drinks for the ten men would now cost just $80.

The group wanted to carry on splitting their bill in the same way. So, the first four men, those least well off, would continue to enjoy free beer. What of the other six? How could they divide the $20 discount in such a way that everyone got his fair share of the windfall?

They realised that $20 divided by six is $3.33. 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.

So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was. This is how the bill now looked.

The fifth man, like the first four, now paid nothing (100 per cent saving).
The sixth now paid $2 instead of $3 (33 per cent saving).
The seventh now paid $5 instead of $7 (28 per cent saving).
The eighth now paid $9 instead of $12 (25 per cent saving).
The ninth now paid $14 instead of $18 (22 per cent saving).
The tenth now paid $49 instead of $59 (16 per cent saving).

Each of the six was better off than before. And the first four continued to enjoy free booze. But, as they left the pub, the men began to compare their savings.

“I only got a buck out of the $20 saving,” declared the sixth man. ”Why should he get $10?” - Referring to the tenth.

“Your right,” exclaimed the fifth man. “I only saved a buck as well. It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get $10 back, when I got two measly dollars? The system is rigged in favour of the Rich!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. It’s always the worst off who get neglected!”

The nine men dragged the tenth into the carpark and gave beat the crap out of him.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had their beer without him. But when the bill came, they found that their money didn’t even cover half of it.

The point is that any general tax cut is bound to favor the people paying the most already.

Of course, if your objective is equality rather than prosperity, you can design a fiscal system around the expropriation of the tenth man. But, he is unlikely to hang around waiting for you to apply it.

1 comment:

flyingvan said...

I like it! Especially the idea of beer subsidies.