Let’s have a Beer

A couple of weeks back Mr. Socks stated that “low-income families don’t benefit from tax breaks because they don’t pay taxes.”

You can imagine that some people were kind of upset by this – but it’s true – most Canadian households with multiple spawn making less than $70K per year – Do NOT pay income tax. Of course, this doesn’t include all the other taxes a person might pay – HST, GST, Consumption tax, property, etc. But it’s absolutely stinkin’ true, on average, 4 of every 10 Canadian households pay nothing towards healthcare, social services, and education. This also includes national defense and any other federally and provincially funded programs.

On the flips side – Two households (The ones that make $150,000+) out of 10 pay much much more. A staggering 70% of all of these costs.

And at the same time, 69 percent of respondents of a recent OECD survey stated the government should tax the rich (Let’s be clear here – not the super rich but households that Mom and Dad make 75K each – There are no yachts on this salary) more than it currently does and give it to the poor. Is this tax fairness? Or tax stupid?

Here’s a story about beer that I adapted from the interwebs. Suppose that every day, 10 people go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this… The first four people (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.

The ten ultimately decide that this arrangement is good and they go drink in the bar every day and are stoked to be able to hang with each other. Until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20”. Drinks for the ten would now cost just $80. Whoo-Hoo. This is good news.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men? How could they divide the $20 savings so that everyone would get their fair share?

They 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 drink his beer. Sounds like a great deal but that’s not going to work.

So, the bar owner suggested that it would be 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 he proceeded to work out the amounts he suggested that each should now pay.

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

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings. “I only got a dollar out of the $20 saving,” 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 benefit 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. This new tax system exploits the poor!”

The nine people surrounded the tenth and kicked the crap out of him. The next night the tenth man didn’t show up for drinks so the nine sat down and had their beers 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 government ministers, is how our tax system works. The people who already pay the highest taxes are carrying the system. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking internationally or they might just decide to reduce their income so they too can enjoy some free beer. Right? Free beer for everyone? Does that even work?

Even if we were to tax the rich 1% more – all 250,000 of them – it would barely make a dent in overall tax revenue. What needs to be considered is chopping a few percents off that 260+ billion dollar budget. This would make a bigger impact than taxing the already taxed even more.

U.S.President Calvin Coolidge said profoundly in his inaugural address ” The wise and correct course to follow in taxation and all other economic legislation is not to destroy those who have already secured success but to create conditions under which everyone will have a better chance to be successful.”

Is it really tax fairness to take from the top but not the bottom? Is it a good idea to take even more from someone who is already carrying the load? Mr. Socks thinks so. Let’s see what happens on Oct 21st.