Funny thing, the Tax system!



The piece below has been written by:


David R. Kamerschen, Ph.D.,
Professor of Economics,
University of Georgia


Suppose that every day, ten men go out for beer and the bill for all ten comes to Rs100. 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 Re1.
The sixth would pay Rs3.
The seventh would pay Rs7.
The eighth would pay Rs12.
The ninth would pay Rs18.
The tenth man (the richest) would pay Rs59.
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 owner threw them a curve. ’Since you are all such good customers, he said, ‘I’m going to reduce the cost of your daily beer by Rs20.
Drinks for the ten now cost just Rs80.
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 Rs20 windfall so that everyone would get his ‘fair share?’ They realized that Rs20 divided by six is Rs3.33. 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 roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid Rs2 instead of Rs3 (33% savings).
The seventh now pay Rs5 instead of Rs7 (28% savings).
The eighth now paid Rs9 instead of Rs12 (25% savings).
The ninth now paid Rs14 instead of Rs18 (22% savings).
The tenth now paid Rs49 instead of Rs59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
‘I only got a rupee out of the Rs20,’declared the sixth man. He pointed to the tenth man,’ but he got Rs10!’
‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a rupee, too. It’s unfair that he got ten times more than I!’
‘That’s true!!’ shouted the seventh man. ‘Why should he get Rs10 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 at all. The system exploits the poor!’
The nine men surrounded the tenth and beat him up. The next night the tenth man didn’t show up for drinks, so the nine sat down and had 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 college professors, is how our tax system works. The people who pay the highest taxes 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.
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