taxation explained.....

Got this from a circulating email. Like the analogy a lot, especially the caption right at the end of it.

UNDERSTANDING TAX

Suppose that every evening, 10 men go out for beer and the bill for all ten comes to RM 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 RM 1.
The sixth would pay RM 3.
The seventh would pay RM 7.
The eighth would pay RM 12.
The ninth would pay RM 18.
The tenth man (the richest) would pay RM 59.

So, that's what they decided to do....... The 10 men drank in the bar every evening and were quite happy with the arrangement, until one day, the owner said, "Since you are all such good customers, I'm going to reduce the cost of your daily beer by RM 20".

Drinks for the 10 men would now cost just RM 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 RM 20 windfall so that everyone would get his fair share? They realised that RM 20 divided by six is RM 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.

Therefore, the fifth man, like the first four, now paid nothing.
The sixth now paid RM 2 instead of R3 (33% saving).
The seventh now paid RM 5 instead of RM 7 (28% saving).
The eighth now paid RM 9 instead of RM 12 (25% saving).
The ninth now paid RM 14 instead of RM 18 (22% saving).
The tenth now paid RM 49 instead of RM 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 rand out of the RM 20 saving," declared the sixth man. He pointed to the tenth man, "but he got RM 10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a rand too. It's unfair - he got 10 times more benefit than me!"

"That's true!" shouted the seventh man. "Why should he get RM 10 back, when I got only RM 2? The wealthy always win!"

"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, labour unions and government ministers, is how our tax system works. The people who 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.

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