The term ‘progressive taxation’ sounds so decent, so right, so positive, so fair, so progressive(!). How could anyone object? Socialist politicians love to talk about progressive values – because it sounds like they are talking about progress. In fact, more often than not so-called progressive values are highly regressive. To the Golden geese, progressive taxation means the rich pay more: not just proportionally more, but exponentially more – the ultimate conclusion being the Pomperipossa Effect (see below).
In the hands of greedy politicians, particularly when under fiscal pressure, progressive taxation inevitably leads to a drop in tax revenue. We justify this rather bald statement by using a metaphor of ten friends from various socio-economic groupings who regularly meet up in a bar. We have lifted this description of progressive taxation from the Net. Supposedly posted by Dr. David R. Kamerschen, Professor of Economics at the University of Georgia, the good professor actually denies authorship. To quote his website: “Contrary to Internet folklore, Dr. Kamerschen is NOT the author of Tax Cuts: A Simple Lesson in Economics or Bar Stool Economics or anything similar to that. Additionally, he does NOT know who wrote it and he has no opinion on its merits”. Since we too have failed to track down the original author, therefore he/she must remain anonymous, and we feel free to quote the story with impunity.
Every day ten men go out for beer, and the total bill comes to $100. If they paid their bill progressively, that is the same way we pay our taxes, the tally 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 would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men drank in the bar every day, and all seemed happy with the arrangement, until one fateful day when the bar owner complicated matters. ‘Since you are all such good customers’, he said, ‘I’m going to reduce the cost of your daily beer by $20. Your drinks will now cost just $80’.
The group decided they would still wanted to pay their bill progressively. Hence, the first four men would still drink for free. But what about the other six paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share’? Dividing the $20 equally between the six who paid would mean they would each save $3.33. However, that would mean the fifth man and the sixth man would each end up actually being paid to drink his beer.
So, the bar owner suggested that it would be fair to pay the new bill progressively, which meant reducing each man’s bill roughly in proportion to the amounts he paid. So he suggested that:
The fifth man, like the first four, now paid nothing (a saving of 100%).
The sixth now paid $2 instead of $3 (a saving of 33%).
The seventh now paid $5 instead of $7 (a saving of 28%).
The eighth now paid $9 instead of $12 (a saving of 25%).
The ninth now paid $14 instead of $18 (a saving of 22%).
The tenth now paid $49 instead of $59 (a saving of 16%).
Each of the latter six was better off than before, and the first four continued to drink for free. However, once outside the bar the men began to compare their savings.
‘I only got one 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 also only saved a dollar. It’s unfair that he got ten times more than I!’ He ignored the fact that originally number ten was paying 59 times as much.
‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? 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 surrounded the tenth, and beat him up.
The next night the tenth man, who incidentally had made the smallest percentage saving, naturally didn’t show up for drinks. So the nine sat down and had beers without him – good riddance! But when it came time to pay the bill, they were in for a shock. All together they didn’t have enough money for even half of the bill!
And that, boys and girls, is how the progressive tax system works. The people who pay the highest taxes get the most benefit from a tax reduction – although they also pay the most of any increase. However, tax them too much, attack them for being wealthy, and they may just choose not to show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
Surely the population at large, or at the very least their representative politicians understand the moral of this story? Raising taxes beyond a certain level will precipitate a backlash amongst the rich, which consequently will lead to a drop in tax revenue. Do they understand? No they don’t. Hence politicians are stuck between a rock (the markets) and a hard place (the voters). The good times are now over, and the financial trouble facing all western economies mean that austerity is staring them all in the face. Be sure they won’t share out the pain equitably – they will be ‘progressive’ about it, and you can expect to see that word liberally scattered throughout political speeches as the moral justification for robbing the rich – who luckily for democratic politicians form only a small minority of voters, although it is a minority who unluckily for those politicians can fly away.
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