Saturday, June 18, 2005

Your tax system at work...

And this just in from another sister. This has to do with a debate that has been running recently over here about tax cuts - the government, in what must be a first, has handed out tax cuts that are roughly the same percentage for each tax group.

Sadly, how the debate has been run is almost exactly like the description below. As a person who's been in the top tax bracket in Australia for over 20 years (not that it takes much to be in the top tax bracket over here), I know I'm going to get it in the neck every time I hear a politician say "This new arrangement will make it fairer for all Australians...."

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You've heard the cry in the last couple of weeks from across Australia: "It's just a tax cut for the rich!", and it is accepted as fact. But what does that really mean?

The following explanation may help.....

Suppose that every night, 10 old school mates go out for dinner at La Porchetta's. The bill for all 10 comes to $100. They decided to pay their bill the way they pay their taxes and it went like this:

* The first four men (the poorest) paid nothing.

* The fifth paid $1.

* The sixth $3.

* The seventh $7.

* The eighth $12.

* The ninth $18.

* The tenth man (the richest) paid $59.


All 10 were quite happy with the arrangement, until one day, the owner said:

"Since you are all such good customers, I'm going to give you a $20 discount."


So now dinner for the 10 only cost $80. The group still wanted to pay their bill the way we pay our taxes.


The first four men were unaffected. They would still eat for free.

But how should the other six, the paying customers, divvy up the $20 windfall so that everyone would get his "fair share"?

They realised that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth and sixth men would each end up being paid to eat. The restaurateur suggested reducing each man's bill by roughly the same percentage, thus:

* The fifth man paid nothing (like the first four) instead of $1 (100%saving).

* The sixth paid $2 instead of $3 (33% saving).

* The seventh paid $5 instead of $7 (28% saving).

* The eighth paid $9 instead of $12 (25% saving).

* The ninth paid $14 instead of $18 (22% saving).

* The tenth paid $49 instead of $59 (16% saving).


Each of the six was better off, and the first four continued to eat for free, as now did the fifth - but outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man "but Fred got $10!"

"That's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that Fred got ten times more than me!"

"That's true!" shouted the seventh man. "Why should Fred get $10 back when I got only $2? 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 Fred (the tenth & richest) and gave him a real hard time.


The next night the Fred didn't show up for dinner. The nine sat down and ate without him, but when they came to pay the bill, they discovered that they didn't have enough money between all of them to meet even half of the bill!

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 at the table anymore.

There are lots of good restaurants in Monaco and the Caribbean.

[With thanks to David R. Kamerschen, Professor of Economics, University of NSW.]

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