Friday, 6 June 2008

Simple analogy on how tax-reduction are not helping the poor

For those who understand, no explaination is needed. For those who do not understand, no explaination is possible!

Let's put tax cuts in terms everyone can understand.

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: (Note: below its just an illustration, actual tax percentage is not used)

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 thearrangement, 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 yourdaily beer by $20."Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so thefirst four men were unaffected. They would still drink for free. But whatabout the other six men - the paying customers? How could they divide the$20 windfall so that everyone would get his 'fair share?' They realizedthat $20 divided by six is $3.33. But if they subtracted that fromeverybody'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 billby 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 $2 instead of $3 (33%savings).

The seventh now pay $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (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 comparetheir savings.

"I only got a dollar out of the $20,"declared the sixth man. He pointed tothe 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 than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 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!"

And that is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction.

4 comments:

Xtrocious said...

Nice analogy but some errors spotted...

The poorest, since they originally did not pay anything, would have ZERO savings...not the 100% you had in your illustration...

You can't save on nothing :)

blabbermouth said...

Interesting analogy. I hazard that you are referring to the one-off personal income tax rebate of 20% announced during this year's budget. It would indeed be accurate except for the fact that you did not take into account the cap on the 20% rebate on personal income taxes for YA 2008. This rebate is actually capped at $2000.

http://www.iras.gov.sg/irasHome/page03.aspx?id=6670

Actually such a tax rebate was never designed to benefit the poor, since the poorest don't get taxed anyway. This rebate was more directed at benefiting the middle or 'sandwich' class, that group of people who don't earn THAT much but who are not poor enough to benefit from government handouts.

For those earning less than 20k per annum, no difference since they don't pay any taxes.

For those earning between 20k to 150k (approximate) per annum, this $2000 or 20% savings of their taxes is rather significant.

For those earning more than 150k (approximate) per annum who pay much more taxes, they probably won't think very much of the $2000 anyway, since it amounts to less than 20% of the total tax amount they pay.

chappy said...

But the people in Singapore aren't getting free drinks. Everyone's paying.

I guess a tax-reduction will help the poor if you follow the phrase "every little bit helps". A tax-reduction is still a tax-reduction. 7% GST reduced to 5% is still going to help the poor.

Sure the rich will benefit but at least the poor will spend lesser... Won't they?

Anonymous said...

you forgot the end of the story...the rich man does not show up the next day to drink and the other 9 men don't have enough to pay the bill...the rich man decides to go drink oversees taking his wealth away.

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