An ode to economics and the tax system

by Mark Alexander

8:29 AM, 3rd April 2013
About 6 years ago

An ode to economics and the tax system

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An ode to economics and the tax system

An ode to economics and the tax systemI have to confess to not being the author of this piece, I found it on Facebook, but I do think it is very worthy of sharing here.

Suppose that every day, ten men 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 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 seemed quite happy with the arrangement, 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 men would now cost just £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 drink for free. But what about the other six men? The paying customers?

How could they divide the £20 windfall so that everyone would get his fair share?

They realised 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.

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 pound 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 pound 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 men surrounded the tenth and beat him up.

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 will naturally 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.

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



Comments

Gillian Schifreen

16:53 PM, 3rd April 2013
About 6 years ago

Oh yes, pity the poor rich sobbing all the way to Monte Carlo on the their yachts. Many of the very rich have got so because many people have no other choice than to work for them for minimum wage.

I am lucky enough to be able to class myself as 'well off'. I'm a fairly small scale developer and when I do start a project I get a huge amount of grief of others like me because I get all the best workmen as I pay good living wages. A developer doing a new build on a site next to mine simply could not understand why I would pay people double (and more) what he was, when as he put it, "you can get away minimum wage".

I drive a 6yr old Honda, which serves me well. He has a top of the range Merc, personalised plate, which he replaces every year. I make a very good living and want for absolutely nothing. Why on earth would I want to make more at the expense of the good people who work for me?

16:54 PM, 3rd April 2013
About 6 years ago

What a ridiculous analogy. It makes absolutely no reference to where the rich get their money. They get it from everybody else. That is why they need to be taxed more than the others. If they emigrated, other people would take their place; there is no shortage of people in the UK.

We need to bear in mind that most of these people are not particularly talented or clever; any sociologist will tell you that. Look at the bankers for example: extremely rich, but have put us into the biggest financial mess since the thirties.

Steve Hards

18:01 PM, 3rd April 2013
About 6 years ago

Good points, Gillian. Envy and greed are very destructive.

20:21 PM, 3rd April 2013
About 6 years ago

It there were NO cheap EU migrants then min wage would not be enough to source workers.
So we have BRITISH construction workers parked on benefits whilst cheap EU migrants do the jobs the BRITISH unemployed construction workers could do.
So we then have the EU migrant back in his own country being a burden to their welfare system; if any.
We have the BRITISH construction worker then off benefits; paying tax and NI; using child benefit to spend in this country and we have developers training up BRITISH workers to do ALL the work in the UK.
You are to be commended for your attitude towards your workforce.
I bet you have apprentices and I bet your workers are more than happy in following you around the country to work on your developments!!
Henry Ford ALWAYS paid his workers so that they could ALWAYS afford one of his cars.
A philosophy that seems lost on your developer associate but one which you seem top appreciate!
The price of everything and the value of nothing springs to mind.
I'm suer if there were more people with your attitude out there we could get rid of the migrants and start using using the unemployed BRITISH worker to do the work that is needed and to reduce the welfare bill.
Unfortunately I do't think there are as many enlightened individuals as you out there!
Which is a great shame for this country as we need proper jobs which you are providing.

20:24 PM, 3rd April 2013
About 6 years ago

Hi

Interesting, but a bit unbalanced, surely it would be a fairer analogy if the richest man was drinking say 60 beers, and paying out more rather than state that all have received the same amount.
Or am I totally missing the point?

And I totally agree with Gillian Schifreen's post

Gillian Schifreen

20:33 PM, 3rd April 2013
About 6 years ago

You do make some good points Paul however I have to say a couple of things. Here on the far South East coast we don't seem to have many EU workmen. I've certainly not come across them except in one instance: I was building my own eco home in 2010. The SIP frame was manufactured in Manchester and trucked to Sussex. It was Feb it was freezing cold and there was snow on the ground. The SIP assembly team came from the North Kent coast and were Lithuanians. The scaffolders I employed were local. The Kent guys were here by 7.30am - they'd left at 4am one day the roads were so bad. The scaffolders absolutely refused to work. We had the site clear and it was safe but it was too cold for them. So the Lithuanian team worked without them, hauling huge panels up to roof level on ladders alone. I couldn't believe it. Scaffold boss came out to apologise and said he just could not get his guys out. He said he's never thought of employing foreign guys but said he was beginning to consider it.
The SIP company told me they just couldn't get British workers to do the job.

Annie Stevens

23:45 PM, 3rd April 2013
About 6 years ago

I am shocked that someone with a PhD in economics would actually think that this silly illustration actually correlates in any way to the reality of the tax situation. For one thing, all of these men would not be drinking together in the first place! The first 8 wouldn't even know of the existence of number 10, who has so much money that he is above all laws and national taxation systems and can get away with paying less tax, in hard cash, never mind percentage terms, than number 4. He doesn't actually work but it amuses him to accrue wealth by speculation, just because he can. He does this via brokers such as number 9, who makes large commissions through manipulating and gambling with the businesses built up by number 8, who has possibly worked hard over time to become successful and employs 6 and 7 to help him manage things on pretty good salaries which make it worth their while and ensures their motivation. 2, 3, 4 and 5 think themselves lucky just to have a job, but they are the ones who actually manufacture the goods and deliver the services that most of us take for granted in a civilised society, even though some of them sometimes struggle themselves to make ends meet or afford many luxuries. Number 1 can't get a job, sometimes because he is lazy, but more likely because he grew up in an environment of hopelessness where jobs were scarce, education inadequate and role models rare. He may at one time have been a number 2,3, or 4, but lost his job thanks to a misjudged gamble or callous whim on the part of 8,9 or 10. He survives on benefits amounting to as much money in a year as numbers 9 or 10 would spend on a casual meal out with two or three friends. Number 2 pays about 10 per cent of his income in PAYE before he lays hands on it, and about 60 per cent of the remainder in the form of council tax, TV license, alcohol duty, tobacco duty and VAT on almost everything he buys. This leaves him with so little that he can't support his family so he has to claim most of this tax money back in benefits. He can't afford a car or a holiday. Numbers 3 to 7 pay between 25 to 30 per cent of their income on PAYE, then 40 to 50% of the remainder in various other taxes like number 2, but they don't grudge it on the whole as they appreciate that this provides public services for the benefit of all. They have enough left to buy a reasonable car, house, holiday etc, and have some quality of life, but only as long as they keep their job. Number 8 doesn't do PAYE and has the opportunity to offset a lot of his day to day as well as business expenses, against his tax liability, so probably manages to pay a bit less tax than most of his employees. Nonetheless he works hard and carries a great deal of risk and responsibility, facilitating a livelihood for a lot of other people. Number 9 knows a LOT of clever ways to avoid paying tax, but even if he paid 60% like almost everyone else who does something useful for a living, he still has more money left than he knows what to do with. Number 10's wealth is off the scale, and he probably pays less than 5 per cent in tax as a nominal gesture to whatever country he chooses to describe as his main domicile, having homes and interests all over the world. 9 and 10 are completely unaffected by anything that happens in the economy, as they know how to turn a profit in any climate, often benefiting directly from the misfortune of others. So 9 and 10 for the most part are just clever manipulative parasites with no social conscience, and the world would be a better place without them. If just some of their wealth was fed back into the system, then everyone who makes the effort to go to work in any job of use or interest to society, would be able to earn enough to support themselves to a reasonable standard and pay taxes and not claim benefits. There is nothing wrong with people becoming filthy rich on the strength of some talent or skill or the profits from a successful business, but when there are people at the other end of the spectrum working in that business who can't even live on their wages, there is something far wrong with the world. Rich people only exist because of poorer people making the stuff and buying the stuff that makes them rich. They should consider themselves lucky that they haven't been rumbled yet. How dare they try to blame the state of the economy on people who have no wealth, power or influence of any kind, when they could themselves clear the whole national deficit at a stroke by sacrificing just one year's bonus on the over-inflated self-awarded salaries they pay themselves, regardless of whether they perform well or not. This so-called "bedroom tax" is probably going to cost more to implement than it saves, and will in any case only save about a third of the amount which will be returned to the wealthy who don't really need it, by cutting the top rate of tax to 45%. The lunatics are truly in charge of the asylum.
Can I also add that I am heartened to see that so far at least a couple of my fellow landlords also disagree with this farcical depiction of the taxation system.

Mick Roberts

10:49 AM, 4th April 2013
About 6 years ago

Brilliant. I have to type some more words, so fantastic too.

11:38 AM, 4th April 2013
About 6 years ago

Doh - This was written by a US professor talking about the US tax system. The UK tax system is much more interesting and there are hard facts:

Facts -> HMRC tax reports: http://www.hmrc.gov.uk/statistics/tax-statistics.htm

From these reports, I get some interesting stats (if you use Excel and the SUM function):

There are approx 30 million income tax payers in the UK.

1) The richest 50% of tax payers, paid 88% of UK income tax.
- So conversely, 50% of the tax payers paid just 12% of the total income tax.
2) The richest 1% of income tax payers paid a massive 25% of all UK income tax!

So the story is this -> piss off the 1%, and the rest of the UK needs to cover the 25% tax loss. This is big pennies and would be a massive 5%-10% increase in income tax rates for the rest of the population.
- In reality, I don't see the whole 1% departing, but even a small number has big tax money implications.

So the question to ask is this - are the rich really not paying any income tax? HMRC is saying they do AND it's a significant chunk of money.

Of course, this does not include CGT, but the numbers are interesting...

Neil Patterson

15:59 PM, 4th April 2013
About 6 years ago

While from an economics point of view I will be unlikely to ever agree with Maslo I have to say the way he wrote it was extremely entertaining. Almost as good as the original article.

I will say that it is proven economic theory (economics is a social science not absolute evidence) that people will not when taken as a group work without reward.

Take individual reward away and we would all be less productive and all worse off regardless of rich or poor. A very senior employee of the Bank of England told me recently that he believed if you halved corporation tax to 11% the country would actually earn more.

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