The following is a tongue in cheek, simplified explanation of a regressive taxation system operating in an environment of increasing government handouts. It has been around for about 10 years. The owner of this blog understands its not a factual economic explanation, but rather an interesting way of explaining regressive tax. The owner of the blog would also like to say – he doesnt drink beer.
Suppose that every day, ten Australian 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 – the paying customers? 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.
Categories: Current Affairs, Political Commentary or Thoughts
Unless I’m mistaken, this is only relevant to PAYG earners. Persons running their own business get many tax breaks. I read recently (can’t verify) that only 8% of profits from mining actually stay in Australia. If that is accurate then it’s a big problem for all Australians.
The issue is Mick that everyone quotes big business stats like the miners. What people dont realise is that the biggest employer in Australia is small businesses – and they are being slammed constantly and raped financially and at some point, the golden goose will die because it wont be worth the risk of going into business. And then we will be a nation that has developed a ferocious appetite for welfare and killed the goose that has been paying for it.
Hello Peter. You have chosen not to publish my comments. Your choice I guess. I would however suggest that I didn’t attempt to publish anything offensive, defamatory or personally attacking you or your beliefs. It is, I would suggest, puzzelling that after being advised of a hoax you fell into, that you did not at very least remove your post. The story you have re-posted has been in cyber-space for over a decade. It originated in the US. The alleged Author, who repudiates anything to do with the story, is American. How does a decade old propoganda article, wrongly, attributted to various US academics relate to Australia in 2012?
You demonstrate that you are more interested in ideology than on facts. Are you going to place the story you posted on your blog in context, or are you more concerned with ideology rather than fact?
I dont know who you are apart from your first name. I assume your last name is Robinson. You make a claim that I have not yet had time to check out so I didn’t publish your comment. You challenged the credibility of my blog in your original comment which I think is a very strong statement. I will remove the economists name off the article.
I notice Tim you havent replied. Interesting, for someone who was so time sensitive on my replies.
Thanks for your ongoing interest Peter. I didn’t really think your comments deserved a response. I thought it was a poor response to feedback from a consumer of your blog. As a publisher, I would have thought you would have done the simplest of checks on one of the “inspirational” stories you chose to publish. If you had you would have found that the story originated in the US about a decade ago and that it has been attributed to a number of academics who all deny that they penned it.
What does the story have to do with the Australian tax system? Little – but then it wasn’t written with Australia in mind.
I don’t think I will be a return reader to your blog. I know you are sensitive to criticism so I will say up front, this is just my opinion. I find you arrogant & conceited.
I wonder if you are prone to jump to such harsh conclusions in every area in your life. You read one comment from me and you have assessed me to be sensitive to criticism, Arrogant and conceited.
You say you want be reading my Blog anymore. I have to say this news doesn’t disturb me in the slightest.
I read the substance of this article about a decade ago and it was in the context of meals at a restaurant. Must say I am very happy to see it again. It isn’t ‘opinion’ it’s just maths. Given the original data of the different contributions made toward the common good and then the change in circumstances “efficiency” the results that follow are just maths. The end scenario hasn’t happened but anyone who wants to explore it hypothetically should look up the fictional character “John Galt” from the book “Atlas Shrugged”. It’s a story about what happens when the rich just get fed up and stop.
The main problem in discussions about wealth is that it gets derailed when we mistake wealth redistribution for wealth creation.
Some wealth accumulates because some people are good at taking it from others. They have developed great systems to protect it and progressively trade integrity, decency and compassion to protect it at all costs.
However, ultimately all wealth originates when someone with a spark of enterprise sees a way to improve something (not just shift money) and does it. This is everything from “I see dirt – I plant something – everyone eats” to development of technological breakthroughs and greater services.
Mark, your point can be argued when the terms “Rich” and “Poor” are used rather than the more correct “Personal Income Tax Payers High or Low”.
The analogy is not too far off when matched with Australian data:
Share of personal income tax (working age)
Share of personal income tax (%) paid by working age population (split into deciles)
1 – 0%
2 – 0%
3 – 0%
4 – 0%
5 – 2%
6 – 5%
7 – 8%
8 – 13%
9 – 19%
10 – 52%
Deciles (lowest to top 10%)
(There is a 1% rounding error)