Here is another pretty accurate description of how taxes work. While this was in the U.S. the principle is the same elsewhere.
Bit of a long read though.
Suppose that every day ten men go out for beer, and the bill for all ten comes to $100.00. If they were to pay their bill the way we pay our taxes it would look something like this:
The first four men (the poorest) would pay nothing.
The fifth man would pay $1.00.
The sixth man would pay $3.00
The seventh man would pay $7.00.
The eighth man would pay $12.00.
The ninth man would pay $18.00.
The tenth man (the richest) would pay $59.00.
So that is what they decided to do. The ten men drank in the bar every day and all seemed quite happy with their arrangement; that is until one day when the bar owner threw them a curve-ball.
“Since you all are such good customers,” he said, “I am going to reduce the cost of your daily beer by $20.00.” The drinks for the ten men would now only be $80.00.
The group still wanted to pay for their beer the same way we pay taxes. So the first four men (the poorest) were unaffected. They would still drink beer for free. But, what about the other six men? The ones actually PAYING for the beer they all drank? How could they divide the $20.00 windfall so each of the men would get his fair share? They realized that dividing $20.00 six ways was $3.33. But if they were to subtract that amount from everybody's share, then the fifth and sixth man would end up getting paid to drink beer!
So the bar owner suggested that it would be the most 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 proceeded to work out the amounts he suggested each man should pay as follows:
The first four (the poorest) would still drink for free.
The fifth man though, now like the first four would pay nothing. (100% savings)
The sixth man would now pay $2.00 instead of $3.00 (33 1/3 % savings)
The seventh man would now pay $5.00 instead of $7.00 (28 1/2% savings)
The eighth man would now pay $9.00 instead of $12.00 (25% savings)
The ninth man would now pay $14.00 instead of $18.00 (22% savings)
The tenth man would now pay $50.00 instead of $59.00 (15% savings)
Each of the six men were better off than before, and the first four continued to drink for free. But once outside the men began to compare their savings.
“I only got a dollar out of the $20.00 savings,” declared the sixth man. Pointing to the tenth man he said, “But he got $9.00!”
“Hey, that's right,” exclaimed the fifth man. “I only saved a dollar too. That's unfair that he got nine times more benefit than I did!”
“That's true,” shouted the seventh man, “Why should he get back $9.00 when I only got back $2.00? The rich get ALL the breaks!”
“Wait just a minute,” screamed the first four men in unison, “We didn't get back anything at all. This system exploits the poor!”
So the nine men surrounded the tenth man and beat him up.
The next night the tenth man did not show up for drinks, naturally. So the nine men sat down and drank their beers without the tenth man. But when the time came to pay the bill they discovered something very important. They didn't even between all nine of them have enough money to even pay one-half of the bill.
And that is basically how the tax system works. The people who already pay the highest taxes will naturally get the most benefit from any tax reduction. Tax them too much, attack them for being wealthy, and they just might not show up any more. In fact they may just start drinking elsewhere where the atmosphere is more friendly.
David R. Kamerchen, PhD.
Professor of Economics
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.