The report of the Tax Working Group was still warm from the printer when the usual suspects started saying, “It’s not fair, the rich benefit most from tax cuts.”
They do for the simple reason they pay more in the first place. I’ve yet to find a better illustration of that fact than this fable which has been circulating by email for years.
Let’s put tax cuts in terms everyone can understand. Suppose that every day, ten people went out for dinner. The bill for all ten came to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four — the poorest — would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the ninth $18, and the tenth diner— the richest — would pay $59.
That’s what they decided to do. The ten diners ate in the same restaurant every day and seemed quite happy with the arrangement — until one day, the owner threw them a curve (in tax language a tax cut).
“Since you are all such good customers,” she said, “I’m going to reduce the cost of your daily meal by $20.” So now dinner for the ten only cost $80.00.
The group still wanted to pay their bill the way we pay our taxes. So the first four were unaffected. They would still eat for free. But what about the other six — the paying customers? How could they divvy up the $20 windfall so that everyone would get his “fair share?”
The six remaining diners realised that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, the fifth and sixth diners would end up being paid to eat their meal. So the restaurant owner suggested that it would be fair to reduce each diner’s bill by roughly the same amount, and she proceeded to work out the amounts each should pay.
And so the fifth diner paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth with a bill of $52 instead of the earlier $59. Each of the six was better off than before. And the first four continued to eat for free.
But once outside the restaurant, the diners began to compare their savings. “I only got a dollar out of the $20,” declared the sixth who pointed to the tenth. “But he got $7!”
“Yeah, that’s right,” exclaimed the fifth, “I only saved a dollar, too . . . It’s unfair that she got seven times more than me!”.
“That’s true!” shouted the seventh, “why should she get $7 back when I got only $2? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four diners in unison, “We didn’t get anything at all. The system exploits the poor!”
The nine diners turned on the tenth and accused her of being greedy. The next night she didn’t show up for dinner, so the nine sat down and ate without her. But when it came time to pay the bill, they discovered, a little late, they were $52 short of paying the bill!
And that is how the 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 other places which tax less.
Where would that leave the rest who can’t afford to go there for dinner?
This is of course simplistic. It doesn’t take into account their are taxes other than income tax, like GST, which everyone regardless of their income pays.
But wealthier people have more disposable income which means they usually consume more and pay more consumption tax too.