## It’s not fair

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.

### 5 Responses to It’s not fair

1. Andrei says:

Taxes by their very nature are unfair but if the new regime balances the tax cuts in the upper brackets by increasing GST then those complaining have a point since the poor and those on fixed incomes have less and in many cases no discretionary income their purchasing power for necessities will be further eroded.

Life is unfair

2. ZenTiger says:

That’s a great parable. I’d seen it before, but worth bringing out for occasions such as this.

I have accepted a default position of pessimism over the tax redistribution exercise, and I think it is looking very dodgy. The more they bang on about it being “fairer” the more suspicious I become.

I think there may be a few short term wins that may take the political sting out of the changes, but ultimately they will likely create a new land tax (which I think a very bad move) and increase GST (which I think will hurt us all in the long run).

Ironically, I am a general supporter (a few minor mods) of the “fair tax” movement in America that suggests REPLACING all PAYE tax and business with a GST of 20%. Such a move will provide many benefits (I’ll do a post about it one day if it ever gets talked about seriously in NZ)

However, lowering PAYE and company tax rates and increasing GST will only mean that PAYE rates will creep up again in future years, and it would be unlikely GST go down. On top of that, homeowners will see the new “land tax” rates increase, and as they retire and their incomes drop, struggle to pay tax on their “security”. It stinks.

3. ZenTiger says:

And I agree with what Andrei says about GST affecting the poor. I’m not confident they will offer a suitable offset for that increase in GST. And even if they do, it will just increase the bureaucracy to administer it.

4. gravedodger says:

Set this parable as a NCEA question at yr 13 english comprehension – discuss?, and publish the answers. Could be a best seller.

5. ZenTiger says:

I’m having a read of the report now. Much to think about. This quote shows why “the rich” (and I think we can include a fair number of middle class in that group, by NZ Tall Poopy standards):

The top 10% of income earners now pay 44% of all personal income tax (if the impact of WfF, New Zealand Superannuation and other benefits including the unemployment benefit are included, the top 10% of taxpayers now pay 76% of net tax).

Ouch.