Now that the tax season is over, let’s read a “lighter” article on tax (again?). Before you cringe, I promise that this will be an entertaining one. While tax planning as a part of financial planning is a dull topic, it is equally important to know the basics.
Suppose that every night, ten men go out for the tarik + roti canai session at their favorite mamak hangout for EPL session and the bill for all ten comes to RM 100…
If they paid their bill the way we pay our taxes, it would go something like this…
The first four men (the poorest) would pay nothing.
The fifth would pay RM 1.
The sixth would pay RM 3.
The seventh would pay RM 7..
The eighth would pay RM 12..
The ninth would pay RM 18.
The tenth man (the richest) would pay RM 59.
… So, that’s what they decided to do..
The ten men had their mamak session every day and were contented with the arrangement, until one day, the owner threw them a curve ball.
“Because you are all such regular patrons,” he said, “I’m going to reduce the price of your daily teh tarik + roti canai meals by RM 20″. Drinks for the ten men would now cost just RM 80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat free suppers. But what about the other six men ? How could they divide the RM 20 “durian runtuh” so that everyone would get his fair share?
They realized that RM 20 divided by six is RM 3.33. But if they deduct that from everybody’s portion, then the fifth man and the sixth man would each end up being paid to have their supper – which makes no sense at all!
So, the mamak’s owner proposed 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 calculate the amounts he suggested that each should now contribute.
And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid RM2 instead of RM 3 (33% saving).
The seventh now paid RM5 instead of RM 7 (28% saving).
The eighth now paid RM9 instead of RM 12 (25% saving).
The ninth now paid RM14 instead of RM 18 (22% saving).
The tenth now paid RM49 instead of RM 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 RM 20 saving,” declared the sixth man. He pointed to the tenth man, “but he got RM 10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a ringgit too. It’s unfair that he got ten times more discount than me!”
“That’s true!” shouted the seventh man. “Why should he get RM 10 back, when I got only RM 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 men surrounded the tenth and bashed him up.
The next night the tenth man didn’t show up for the EPL session, so the nine sat down and had their the tariks and roti canai without him. But when it came time to pay the bill, they discovered something important. They didn’t have sufficient money among 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 will naturally get the most benefit from a tax reduction. Tax them too much, assault them for being filthy rich, and they just may disappear once and for all. In fact, they might start going for more “atas” place overseas for their EPL sessions, where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
This article is written for entertainment purpose and should be treated as an accurate representation of how the tax bracket system works for Malaysian taxpayers.
The analogy is adapted from Jeremy Salvador’s post – Illustration of How the US Tax System Works, from Zero Passive Income blog. ZPI Blog is a friend of LCF on Personal Finance.
I’ve modified the beer analogy and localized it with the tarik + roti canai sessions, to respect our Muslim readers out there.