An ode to economics and the tax system

by Mark Alexander

8:29 AM, 3rd April 2013
About 8 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


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Comments

18:00 PM, 4th April 2013
About 8 years ago

Great explanation by Maslo, but I would disagree with SimonBB: I would say that if we don't mind pissing off the rich, we can have all their money to spend for ourselves. Don't forget, they only have so much because they take so much from the rest of us.

Annie Stevens

23:07 PM, 4th April 2013
About 8 years ago

Tom, I'm inclined to agree with you that these people wouldn't be missed. I find it hard to believe that there are not enough clever, creative, talented, experienced people WITH scruples, who could take over the running of our economy from these self serving types, and would be happy to do so for only twenty times the national average salary as opposed to a hundred times.
Simon, thanks for the link to the HMRC website, it makes for very interesting reading indeed, albeit a bit hard going. It does illustrate how different people can extrapolate different conclusions from the same statistics. What I picked up was that PAYE tax payers (probably earning less than £50k, since I also read that 91% of tax payers earn less than £50k) accounted for £132,189 million of tax receipts in 2011/12, whereas self-assessment taxpayers (£50k to the sky’s the limit) paid £20,344 million. I also read that the top 1% pay proportionately less than the top 10%, which seems odd to me.
I think I could manage quite well on 50% of £2 million, as opposed to 90% of £15K.
Neil, I have no economic training so I don't know about corporation tax or what implications it has for ordinary wage earners, but I do concur with the sentiment that most people are motivated, at least to some extent, by adequate reward for their efforts. What I don't understand is how our esteemed leaders like to quote this as the reason why we have to reward millionaire bankers and business leaders with silly money bonuses, while thinking that ordinary people will be motivated by freezing their already paltry incomes and withdrawing little bits of support that might help them get back into work. IT'S JUST PLAIN NUTS!!!

Neil Patterson

10:05 AM, 5th April 2013
About 8 years ago

Hi Maslo, I agree that rewarding failure as has been headlined in the press recently is totally wrong and makes me extremely angry.

However economics and political decisions should not be taken, because of individual cases as these will only be a tiny percentage.

What is killing our economy is Bureaucracy, Government waste and a tax system that stifles productivity. Make it easier to do business and the rewards for productivity higher and we will all be better off. That I can't believe is disputable by anyone.

Pure Stalinist Communism just does not work and has consistently been proved not to work. You need a balance that rewards effort, but protects the vulnerable.

11:12 AM, 5th April 2013
About 8 years ago

@Maslo - you have the numbers wrong.

Use Table 2.5 which is tax split by income ranges.

Then total up the payments from the bottom (highest income) to the top on one of the tables for the 2012-2013 numbers.
From this you get the following:
1) The top 10% of all income payers (effectively anybody earning above £50K) pays 56% of all income tax for the country. (£88Billion out of a total £159Billion).
2) The top 0.013%, just 4000 people, paid 4% of all income tax (£7 Billion).
- This is the highest income bracket in the table denoting people who earn over £2million a year.
3) This same top percentile, paid this at an average tax rate of 45%.
- This IS the highest tax rate for across all income payers. Nobody else pays a higher rate of tax.

4) If we consider the top 1% of income tax payers, effectively anybody earning more than £150K per year (300000 people), then they paid 27% of the income tax for the UK - which is £42 billion.
- The average tax rate is between 33%-45%. This is again higher than the remaining income tax payers.

This are hard numbers. Have a look at the numbers and use a calculator if you want to.

You can be angry with these people if you want (which is what I see from some of the posters here), but 300000 people paid £42Billion in income tax to the UK government last year at higher tax rates than anybody else. My preference is that these people keep on doing this... What's yours?

@Tom Trainer - I think your views are fact. We already get the most amount of income tax from the highest paid... that's what you wanted - right?

13:53 PM, 5th April 2013
About 8 years ago

@Maslow, interesting to have an opportunity to chat with you via this wonderful modern technology.

Do you think 9 and 10 are more likely to be self made or that they have inherited such wealth? My theory is that they are more likely to have been born into privilege. However, their ancestors started with nothing at some point, would you not agree?

It was less than 100 years ago that Vladimir Lenin had all the 9's and 10 in his country killed. A 90 year experiment with millions of lives ensued. It failed.

Anon

14:04 PM, 5th April 2013
About 8 years ago

An economics teacher at a local school made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that, if socialism was fully adopted, no one would be poor and no one would be rich, and all would be equal.

The teacher then said, ‘OK, we will have an experiment in this class’. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for pounds – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy.

When the 3rd test rolled around, the average was an F.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the teacher told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, and gives to those who do nothing, no-one will try or want to succeed.

It could NOT be any simpler than that.

Remember, there will be a test in the future – the next election.

These are possibly the 5 best sentences you’ll ever read and all applicable to this experiment:

1. You can not legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it!

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation

19:39 PM, 5th April 2013
About 8 years ago

SimonBB: No, we don't get the most income tax from the rich; we used to get miles more. We get less now than we have done in a long time. The rich need to pay a lot more, not just a bit more.

I assume you don't mean we get more from the rich than from the poor because that is simply stating the obvious.

19:41 PM, 5th April 2013
About 8 years ago

Neil Patterson: you say "Make ... the rewards for productivity higher and we will all be better off. That I can’t believe is disputable by anyone."

Do you have any justification for this strange claim?

19:48 PM, 5th April 2013
About 8 years ago

anon's story, if it weren't apocryphal would be a good demonstration of why economics is a pseudo science. It can never prove anything but can be used to support claims that are patently incorrect. As it is not a science, these claims can never be disproved.

Freda Blogs

21:08 PM, 5th April 2013
About 8 years ago

I don't understand why many are bashing the rich on this thread. Wealth comes from a number of different sources: inherited, lottery wins, hard work, luck. Many of the wealthiest people in the UK have earned their money through property, which is exactly the industry that we all have in common, so why the negativity?

The "code" posted serves to show the dynamics of the tax system, which often gets lost in the politicking and media hype, and which, ironically, the wealth bashers are reinforcing.

The code models very well how the wealthy, contrary to what we see and hear on TV, are contributing substantial amounts into our tax system, particularly when looked at as a proportion to those who are not.

The moral of the story is clear: the wealthy are very necessary to the economic survival of this country, and alienating them to the degree that they wish to leave will be disadvantageous and potentially financially catastrophic to all of us.

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