The Tax System explained in terms of beer
Suppose that every day, 10 men go out for beers and the bill for all 10 comes to R100...
If they paid their bill the way we pay our taxes, it would go something like this...
The first four men (the poorest) would pay nothing.
The fifth would pay R1.
The sixth would pay R3.
The seventh would pay R7.
The eighth would pay R12.
The ninth would pay R18.
The tenth man (the richest) would pay R59.
So, that's what they decided to do..
The 10 men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by R20". Drinks for the 10 men would now cost just R80.
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? How could they divide the R20 windfall so that everyone would get his fair share?
They realized that R20 divided by six is R3.33. 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 his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, 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 (100% saving).
The sixth now paid R2 instead of R3 (33% saving).
The seventh now paid R5 instead of R7 (28% saving).
The eighth now paid R9 instead of R12 (25% saving).
The ninth now paid R14 instead of R18 (22% saving).
The 10th now paid R49 instead of R59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
"I only got a rand out of the R20 saving," declared the sixth man. He pointed to the 10th man, "but he got R10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a rand too. It's unfair that he got 10 times more benefit than me!"
"That's true!" shouted the seventh man. "Why should he get R10 back, when I got only R2? 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 10th and beat him up.
The next night the 10th 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 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 may 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!
If they paid their bill the way we pay our taxes, it would go something like this...
The first four men (the poorest) would pay nothing.
The fifth would pay R1.
The sixth would pay R3.
The seventh would pay R7.
The eighth would pay R12.
The ninth would pay R18.
The tenth man (the richest) would pay R59.
So, that's what they decided to do..
The 10 men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by R20". Drinks for the 10 men would now cost just R80.
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? How could they divide the R20 windfall so that everyone would get his fair share?
They realized that R20 divided by six is R3.33. 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 his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, 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 (100% saving).
The sixth now paid R2 instead of R3 (33% saving).
The seventh now paid R5 instead of R7 (28% saving).
The eighth now paid R9 instead of R12 (25% saving).
The ninth now paid R14 instead of R18 (22% saving).
The 10th now paid R49 instead of R59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
"I only got a rand out of the R20 saving," declared the sixth man. He pointed to the 10th man, "but he got R10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a rand too. It's unfair that he got 10 times more benefit than me!"
"That's true!" shouted the seventh man. "Why should he get R10 back, when I got only R2? 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 10th and beat him up.
The next night the 10th 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 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 may 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!
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