Thursday, April 23, 2009

How should you really split the restaurant bill?

I thought that today I would attempt to get everyone thinking about the complexities of our current Tax System by offering you the following excellent article by an unknown author titled "Who really pays tax?". It's an example of a beautiful analogy of an ugly and complicated issue and I hope it results in some serious pondering by you and possibly some alternative ideas to end the demotivation that the current system brings "to the table".

"Here is the REAL story to lighten the Budget discussion! You've heard the cry from across Australia in the last couple of weeks: "It's just a tax cut for the rich!" - and then it's accepted as fact. But what does that statement really mean?

The following explanation may help.

Suppose that every night, ten men go out for dinner at La Porchetta's. The bill for all ten comes to $100. They decide to pay their bill the way we pay our taxes, and it goes like this:

  • The first four men (the poorest) paid nothing.
  • The fifth paid $1.
  • The sixth $3.
  • The seventh $7.
  • The eighth $12.
  • The ninth $18.
  • The tenth man (the richest) paid $59.

All 10 are quite happy with the arrangement, until one day, the owner says: "Since you are all such good customers, I'm going to reduce the cost of your daily meal by $20. " So now their dinner for ten only costs $80.

The group still decides to pay their bill the way we pay our taxes. The first four men are unaffected. They will still eat for free. But how should the other six, the paying customers, divvy up the $20 windfall so that everyone would get his "fair share"?

They realise that $20 divided by six is $3.33.

But if they subtract that from everybody's share, then the fifth and sixth men would each end up being paid to eat. The restaurateur suggests reducing each man's bill by roughly the same percentage, thus:

  • The fifth man pays nothing (like the first four) instead of $1 (100%saving).
  • The sixth pays $2 instead of $3 (33% saving).
  • The seventh pays $5 instead of $7 (28% saving).
  • The eighth pays $9 instead of $12 (25% saving).
  • The ninth pays $14 instead of $18 (22% saving).
  • The tenth pays $49 instead of $59 (16% saving).

Each of the six are better off, and the first four continue to eat for free, as now does the fifth - but 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!"

"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 men then surrounded the tenth and beat him up. The next night the tenth man didn't show up for dinner. The nine sat down and ate without him, but when they came to pay the bill, they discovered that they didn't have enough money between all of them to meet even half of the bill!

That, boys and girls, journalists and college professors, is how our 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 Monaco and the Caribbean."

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