Pie in the sky? It's the price you pay

Wednesday, 10 August 2011

In every economy, there’s a finite amount of revenue — the national pie. There are only so many slices to go around, and almost every politician in the world is concerned with how can one get a bigger slice of that pie for one’s own constituency.

The problem, almost everywhere in the world, is that the people baking the pie are not the people eating most of the pie. In the US for example, half the population pay no income1 taxes – none whatsoever. Here in our country, it’s even worse: there are about 6 million people who pay taxes, and we taxpayers effectively support the rest of the country of 40-something million.

To understand how this works, here’s a capitalist parable – author unknown. Every day 10 people go out to dinner. The bill for all ten comes to R1000, but they pay the bill the same way we pay our taxes; according to our income.

So, the first four pay nothing; the fifth pays R10; the sixth pays R30; the seventh R70; the eighth R120; the ninth R180. The tenth (the richest) pays R590.

So the 10 ate dinner in the restaurant every day and seemed quite happy with the arrangement until the owner one day said: “Since you are all such good customers, I’m going to reduce the cost of your daily meal by R200. So dinner for 10 now costs R800.

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The first four dinner guests were unaffected as they still ate for free. The question was how to divide the R200 savings among the remaining six so that everyone got a fair share? The guests realised that R200 divided by 6 is R33.33, but if they subtracted that from everybody’s share, then the fifth and the sixth guests would end up being paid to eat their meal.

The restaurant owner suggested that it would be fair to reduce each person’s bill by a proportionate amount, and he proceeded to work out the amounts each should pay.

So the fifth now paid nothing; the sixth pitched in R20; the seventh paid R50; the eighth paid R90; the ninth paid R120; leaving the tenth guest with a bill of R520 instead of R590. Outside the restaurant, the guests began to compare their savings.

“I only got R10 out the R200,” declared the sixth. Pointing to the tenth, he said, “And he got R70!”

“Yeah, that’s right,” exclaimed the fifth. “I only saved R10, too. It’s unfair that he got seven times more than me!”

“That’s true,” shouted the seventh. “Why should he get R70 back when I got only R20? 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 guests surrounded the tenth and beat him up. The next night he didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important — they were R520 short.

So that’s how our tax system works. If you are earning R5 000 per month or less, you pay no income tax whatsoever. If you earn R50 000 per month or more and get a R100 pay increase, R40 of that goes to Pravin Gordhan who uses it to pay for child support grants, anti-retrovirals, and other useful things. (It also pays for useless things, such as inflated rentals for police headquarters and R100-million parties for drunken youth, but that’s not Pravin’s fault.)

And that’s why high salaries for executives are a good thing. If money gets paid out to shareholders as profits, Pravin gets 28 percent of that money as company tax. If the money gets paid to an executive, Pravin gets 40 percent.

So, next time you hear someone complaining about the rich getting richer, remember the benefits that flow from that. Someone has to pay for dinner.

  • 1. The original text omitted the word "income" as pointed out at here.