In India, we have often talked about, debated upon the tax policy we have in India and what are its ramifications on the taxpayers. To me, our tax policy relates very much to a story of 10 friends who go out for beer. The bill for all ten comes to Rs.1000. If they paid their bill the way we pay our taxes, it would go something like this:
The first four (the poorest) would pay nothing.
The fifth would pay Rs.10
The sixth would pay Rs.30
The seventh would pay Rs.60
The eighth would pay Rs.130
The ninth would pay Rs.170
The tenth (the richest) would pay Rs.600.
The ten friends drank in the bar every day and are happy with this arrangement, until one day, the owner threw them to rejig. "Since you are all such good customers, I reduce the cost of your daily beer by Rs.200." This meant that drinks for the ten would now cost just Rs.800.
The group still wanted to pay their bill the way we pay our taxes so the first four were unaffected. They would still drink for free. But what about the other six paying customers? How could they divide the Rs.200 so that everyone would get his 'fair share?' They realized that Rs.200 divided by six is Rs.33.3. But if they subtracted that from everybody's share, then the fifth and the sixth friend would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each one's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:
The fifth fiend, like the first four, now paid nothing (100% savings).
The sixth now paid Rs.20 instead of Rs.30 (~33%savings).
The seventh now pay Rs.40 instead of Rs.60 (~28%savings).
The eighth now paid Rs.100 instead of Rs.130 (~25% savings).
The ninth now paid Rs.130 instead of Rs.170 (~22% savings).
The tenth now paid Rs.510 instead of Rs.600 (~15% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men started comparing their savings.
"I only got a dollar out of the Rs.200," said the sixth friend. He pointed to the tenth friend," but he got Rs.90!"
"Yeah, that's right," exclaimed the fifth friend. "I only saved a dollar, too. It's unfair that he got nine times more than I!"
"That's true!" shouted the seventh. "Why should he get Rs.90 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four in unison. "We didn't get anything at all. The system exploits the poor!"
The nine friends surrounded the tenth man (the richest) and beat him up. The next night the tenth friend did not come for drinks, so the other nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have even half the money to pay the bill!
And that, 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 anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
