Friday, February 27, 2015

Inequality 22: Ten Men Eating Equally but Paying Unequally

Should governments tax the rich more?

This photo I got from the web. High inequality, right? This can mean many things, like:

1. The poor living on the left have jobs, direct or indirect, from the people who built and live/work on those beautiful condo buildings on the right.

2. People on the left were not there before. No one lived there. Until constructions on the right started, and people from rural areas or from other communities started moving to the community on the left.

Below is a good parable pf ten men. I got this from a friend, Wan Saiful Wan Jan, IDEAS' CEO.

Every day, ten men go out for dinner. The bill for all ten comes to $100. If they pay 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 $7.
. The eighth $12.
. The ninth $18.
. The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men ate dinner in the Restaurant every day and seemed quite happy with the arrangement, 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 your daily meal by $20.”

So, now dinner for ten only cost $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 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 men realized 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 eat their meal. So, the restaurant owner suggested that it would be fair to reduce each man’s bill by 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 paid $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 eat for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,” 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 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. The system exploits the poor!”

The nine surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for dinner, so the nine sat down and ate 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 college professors, is how progressive tax system works. Tax the rich too much, attack them for being wealthy, and they just may not show up at the table anymore.

See also:

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