Ten beer-guzzling men & Taxation system
I humbly request the members to read this lengthy post very carefully and ponder over it. Please don't ignore it reading only the title.---------------------
Every day, ten men used to go out for beer in a beer pub and the bill for all ten used to be Rs. 100/-. They paid their bill the way we pay our taxes. So, it was like the following:-
The first four men (the poorest) would pay nothing.
The fifth would pay Re. 1/-.
The sixth would pay Rs. 3/-.
The seventh would pay Rs. 7/-.
The eighth would pay Rs. 12/-
The ninth would pay Rs. 18/-.
The tenth man (the richest) would pay the remaining Rs. 59/-.
So, they were managing in this way.
The ten men drank in the pub every day and were quite happy with the arrangement. But one day, the owner of the pub brought a new offer for them.
"Since you are all such good customers," he said, "I am going to reduce the cost of your daily beer by Rs. 20/-". Drinks for the ten men would now cost only Rs. 80/-.
The group of ten men still wanted to pay their bill the way we pay our taxes.
So the first four men were unaffected by the price reduction. They would still drink for free. But what about the other six men?
How could they divide the Rs. 20/- benefit so that everyone would get his fair share?
They realized that Rs. 20/- divided by six is Rs. 3.33/-. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being paid (instead of paying) for the beer which they consumed.
So, the pub 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 Rs. 2/- instead of Rs. 3/- (33% saving).
The seventh now paid Rs. 5/- instead of Rs. 7/- (28% saving).
The eighth now paid Rs. 9/- instead of Rs. 12/- (25% saving).
The ninth now paid Rs. 14/- instead of Rs. 18/- (22% saving).
The tenth (the richest) now paid Rs. 49/- instead of Rs. 59/- (16% saving).
Each of the six got a better deal than before. And the first four continued to drink for free. But, once they caame outside the pub, the men began to compare their savings.
"I only got one rupee out of the total saving of Rs. 20/-," said the sixth man. He pointed to the tenth man," but he got Rs. 10/-!"
"Yes, that's right," exclaimed the fifth man. "I only saved a rupee too. It's unfair that he got ten times more benefit than me!"
"That's true!" shouted the seventh man. "Why should he get Rs. 10/- back, when I got only Rs. 2/-? The wealthy get all the benefits!"
"Wait!" yelled the first four men, "we didn't get anything at all. This new system exploits the poor!"
The nine men surrounded the tenth and gave him a good thrashing.
The next night the tenth (richest) man did not turn up in the beer pub. So the other nine sat down and had their beers without him. But when it was time to pay the bill, they discovered something important. They did not have enough money between all of them for even half of the bill amount!
And that is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit in case of 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 friendlier.
[ Concept: David R. Kamerschen, Ph.D. Professor of Economics]