How the tax system works 29



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Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. 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 $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 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 $20″. Drinks for the ten men would now cost just $80.

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 $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 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 $2 instead of $3 (33% saving). The seventh now paid $5 instead of $7 (28% saving). The eighth now paid $9 instead of $12 (25% saving). The ninth now paid $14 instead of $18 (22% saving). The tenth now paid $49 instead of $59 (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 dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man,”but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. 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 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. This new tax 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 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

Thanks to Russell for sending this in.

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  1. We are over taxed…. Our taxes are wasted on things not needed…. And on other countries .

    2 REPLY
    • When we have a Liberal government we have: Vietnam, Iraq, and now Iraq again fixing up the mess Liberals left by invading Iraq. Plus providing (poorly) for our own damaged veterans plus helping all the refugees our warmongering has produced. I believe the $ cost of all this warmongering is still a national secret. Would dearly like to know the exact amount. Thanks to Menzies, John Howard and now Tony Abbott.

      2 REPLY
      • Woaaaa…. Leonie It was the labor government who put the country in to the debt it is in .Howard left a huge surplus which labor wasted within the first 12 months .

      • Toys for the defence industry’s boys is the bribe we pay the military to not interfere with civilian affairs. i.e. to not run a revolution.

    • i agree with some of that.. but labour also have their bit in the war too…. they sent troupes and ammunition over seas over the years as well…. they also open the borders for terrorists . they also had a hand in the wars…..

  2. Thought provoking – but I still think everyone (not businesses) should pay about 5-10% tax with no allowances at all, that way those on a low income pay a small amount and those on big money pay lots – and getting rid of all allowances (keeping the tax free threshhold for all) means that’s how it stays (no more having a big money person getting their accountant to find all the ‘allowances’ to bring his tax down to a couple of dollars!)

    1 REPLY
    • Josephine, might I refer you to the principles of “progressive” taxation?

  3. The big money people pay tax and they use the same entitlements as everyone else, they may just have more write offs because they spend more. The problem lies not with those ones, but with the ones, as in the example given. that pay nothing, often this is because they are working under the table and drawing benefits, not paying the appropriate child support because they are hiding their income, they are the ones that are draining this country because they are contributing nothing but taking the most. High income earners are not the blight on the economy that is often suggested just the same as the baby boomers are not responsible for all this country’s woes as it has also been inferred.

    3 REPLY
    • Not necessarily Wanda, nothing wrong with being rich if you pay your fair share but they dont. As I wrote above if you can afford a creative accountant then you pay less tax. Its not illegal its immoral. How about so many corporations who pay no tax at all. How is that right????? The middle classes support the rich and the poor. I have no problem with the poor.

    • I see what your saying Sheryle Cohen Cowan but at least the corporate level usually create employment and pay super etc. I have no problem with the honest poor either I would be the first one to put my hand in my pocket to help them but I’m sorry to say there is just too many dishonest ones and they think it’s funny how they have managed to rip off the government and they seem to think they have the natural right to sponge of the system and pay no tax at all. These are the ones I object to paying for. It doesn’t matter what tax level we’re on, all of our accounts are what you would call creative and none of us tells them not to get that extra dollar back for us if he can as long as it’s legal. We all do it whether we earn a little or a lot but I’m sure there is one thing we can agree on is that the system seems to be broken and usually the ones that can least afford it pay and yes that would be in most cases the higher low to middle classes. Such a horrible expression but I’m sure you know what I mean.

    • Sadly the miners in Australia only employ about 1% of our workers – source, The Australia Institute (probably going to be less now that they can bring in overseas workers and displace Australians)

  4. Now work it out on diesel fuel. The poor and the working class get no fuel discount. Some Farmers/graziers get some, Australian and Foreign Mining companies get the most. Absolutely all Gina’s fuel would be paid for by the company. So Gina gets her fuel and her beer for nothing. Our tax system doesn’t take any of that into consideration.

    1 REPLY
    • Gina doesn’t get her fuel and beer for nothing because Fringe Benefits Tax is levied at about 34% on the value of that sort of benefit.

  5. Anyone who thinks that tax avoidance is not a huge issue for our economy must be dreaming. Our tax laws need a huge overhaul. One of the ways the rich corporations avoid tax is to have a parent or associated entity overseas. You then ‘borrow’ money from the entity at huge interest ( far far above that you would get from day a bank.) profit goes into paying off this loan, money flows overseas where you collect it! If laws were changed and the mega rich were not allowed so many avoidance schemes, our country would probably have a surplus!

  6. What a load of crap. The rich man would not be drinking with a poor man. The rich man would be in his office counting his money and trying to work out how he can rip poor men off for more money. The rich man would be telling his very rich lawyer and accountant how he wants to keep more and more of his hard earned cash. He certainly would not be shouting the poor man to free beers. The poor man would be grabbing a 6 pack and taking it home (if he could afford either). He would be getting down on his knees thanking God that the rich man bestowed on him the privilege of working for a pittance of what the rich man gets. He would be tying himself up in knots trying to please a ignoramus who has no idea he even exists. No. This is a stupid article written by someone who does not have a clue about the real world and spends his time in an ivory tower.

    1 REPLY

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