The tax system explained using a beer analogy:-

[laserblazer]

Suppose that once a week, 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.

And the tenth man (the richest) would pay £59.

So, that's what they decided to do.

 

 

 

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. "Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly 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 realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.

 

So, the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage. They decided 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 (a100% saving).

The sixth man now paid £2 instead of £3 (a 33% saving).

The seventh man now paid £5 instead of £7 (a 28% saving).

The eighth man now paid £9 instead of £12 (a 25% saving).

The ninth man now paid £14 instead of £18 (a 22% saving).

And the tenth man now paid £49 instead of £59 (a 16% saving).

Each of the last six was better off than before with the first four continuing to drink for free.

 

But, once outside the bar, the men began to compare their savings. "I only got £1 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 £1 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 only got £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 week 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 to pay 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 might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

 

 

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible

Edited November 23, 2010 by ZeroHour

[MK-2]

i don't drink alcohol, does this mean I am being unfairly taxed?

[laserblazer]

i don't drink alcohol, does this mean I am being unfairly taxed?

 

Sounds like tax evasion to me

[CAM]

Just sent this off to our Politics teacher.

[SpuffMonkey]

I suppose the alternative view would be that they all get charged £10 from the start, but the poorest 5 can't afford to drink and die from dehydration, just to put more of a left wing swing on the analogy.

[aerospacemango]

I suppose the alternative view would be that they all get charged £10 from the start, but the poorest 5 can't afford to drink and die from dehydration, just to put more of a left wing swing on the analogy.

 

I disagree (unless I'm reading your reply wrong) but I think this is a right-wing argument for less taxation of the rich.

 

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 might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

This is the most telling part of the whole thing......

 

Rich people upping sticks and sliding off to somewhere else so they pay LESS tax!

 

During the 70's, when the Labour Government had an income tax rate of 99p for the VERY highest earners, they all bu**ered off abroad, and could only come back for 90 days in any tax year. That is obviously wrong.....No-one should pay 99p in the £ tax, but the highest earners SHOULD be paying more tax.

 

(Spuff....If I have mis-read your reply, then I apologise. If not, then I look forward to the discussion!!!)

[DrummerBoy]

I think the point is that the rich are already paying the most tax, and it would be self distructive to society at large to rig the game to such an extent that they are better off upping sticks and moving?

 

On what basis should the rich be paying more tax?

[seanlaz]

haha, this is brilliant. thumbs up.

[torledo]

I think the point is that the rich are already paying the most tax, and it would be self distructive to society at large to rig the game to such an extent that they are better off upping sticks and moving?

 

On what basis should the rich be paying more tax?

 

but they are already better off, monetarily, by 'upping sticks' to other tax jurisdictions. There are other reasons besides the % at which higher rate taxes and corporate taxes kick in as to why many of our best and brightest haven't sloped off. Although i know many have been tempted away [if only for a few years] by treble or quadruple the gross salary in a low or zero-income tax zone...

 

This issue is very topical at the moment, what with the US making an important decision on whether or not to extend tax breaks for very high earners, plus Irelands very low corporation tax rate and whether that is non-negotiable as far any potential bailout concessions.

[Dos_Box]

but they are already better off, monetarily, by 'upping sticks' to other tax jurisdictions. There are other reasons besides the % at which higher rate taxes and corporate taxes kick in as to why many of our best and brightest haven't sloped off. Although i know many have been tempted away [if only for a few years] by treble or quadruple the gross salary in a low or zero-income tax zone...

 

This issue is very topical at the moment, what with the US making an important decision on whether or not to extend tax breaks for very high earners, plus Irelands very low corporation tax rate and whether that is non-negotiable as far any potential bailout concessions.

 

The problem with that statement is that we are living in a global economy. It is now easier than ever to up sticks and off. Banking travel and property purchase are now easy, quick and affordable. Don't forget the rich (whilst having more money than most) also spend more. The less they have to spend, the less they buy, putting all kinds of people out of work. Take it from them in taxes and do you honestly think Joe Public will see any of it? It is also the very rich that create jobs and pay wages. If they relocate then chances are they will do the same with their businesses. If they can't move, and you tax them more, then chances are they will employ fewer people. Simply pointing at them and declaring 'You're rich, we'll take more money from you' works just the same as 'You're poor, we'll take more money from you'. As for rich people being tax dodgers, I can assure you they are not. Yes, they have accontants, but to pay no tax whatsoever leaves them wide open to investigation by the revenue, and the penalties for non-payment of taxes are very severe indeed.

Edited November 23, 2010 by Dos_Box

[Ketlane]

The curious paradox, which I cannot face finding the sources for (nearly midnight as I type this), is that when the top rate of tax is reduced, very often the total amount of tax revenue increases. Presumably the very rich don't move abroad, the fairly rich spend less time and effort on avoiding tax and more on making money (which is taxed); and the just-about-OK find it more rewarding to do overtime/get another job/whatever so also generate more tax income. So: if you want the rich to pay more, tax them less!

[torledo]

The problem with that statement is that we are living in a global economy.

 

agreed. which makes a beggar they neighbour approach to lowering taxes even more pointless, arguably.

 

It is now easier than ever to up sticks and off.

Banking travel and property purchase are now easy, quick and affordable.

 

i don't disagree. But there's a reason london is amongst the top financial centres in the world, if not the top. And i don't think it's because it's the lowest tax centre for either business or individuals ? Infrastructure and services, family ties of employees, language, convenience. All of these can matter just as much as headline rates of taxes.

 

Don't forget the rich (whilst having more money than most) also spend more.

 

is that actually true ? As an income group, do they really spend more than some of the lower income groups ? either in total or as a % of income.

 

The less they have to spend, the less they buy, putting all kinds of people out of work.

 

if any contraction in spending were to occur becuase of large numbers of rich people leaving the country [which is the usual scare story against raising taxes], then that gap can be filled by others having the increases in income order to spend, which is down to how government chooses to spend and tax. OR if lower income groups are doing the bulk of the spending as it is, i don't see the above as a major problem except maybe for certain niche high-end areas of the economy [some of which may already be driven by foreign investment ?], and which possibly don't employ masses amount of people anyway.

 

It is also the very rich that create jobs and pay wages.

 

i personally think govt. and consumer spending creates jobs. industrialists/capitalists/entreprenuers identify opportunities where they can sell goods and services to the government [because govt. has to spend first before anyone else sees the money] and in order to meet tax obligations. Selling goods to consumers is a chicken and egg, consumers need jobs in order to spend and so business selling goods and employees are reliant on each other. you could argue that consumers[employees] allow the very rich to create jobs and make profits, after govt. first spends that money in the economy.

 

If they relocate then chances are they will do the same with their businesses.

 

the argument i mentioned above about infrastructure, language, other conveniences still applies. i don't think you have to be the lowest tax centre to create and keep jobs.

 

If they can't move, and you tax them more, then chances are they will employ fewer people.

 

taxes aren't the sole reason a business might employ fewer people. IF vested interests were to claim that the national minimum wage were a hindrance to them wanting to employ more people, you wouldn't automatically assume it a good idea to scrap the NMW for example. similarly adjusting taxes based purely on what private companies job creation intentions may or may not be isn't the best way to run a sovereign government imo.

[torledo]

The curious paradox, which I cannot face finding the sources for (nearly midnight as I type this), is that when the top rate of tax is reduced, very often the total amount of tax revenue increases. Presumably the very rich don't move abroad, the fairly rich spend less time and effort on avoiding tax and more on making money (which is taxed); and the just-about-OK find it more rewarding to do overtime/get another job/whatever so also generate more tax income. So: if you want the rich to pay more, tax them less!

 

fair points about lower taxes to stimulate investment, don't know whether that top rate of tax reduction is driving tax revenue increases or whether the reduction is as a result of wider economic acceleration, which will undoubtedly increase tax revenues for the exchequer.

 

but regardless, government should never be concerned merely with the volume of taxes collected. All too often the fundamental reasons for the existence of taxes are ignored in these arguments....redistribution being one important element.

[DrummerBoy]

Torledo, interesting viewpoints here.

 

Out of interest (and I am interested) why do you consider redistribution an important element?

 

Is it not people trying to get something for nothing part of what got us into the current financial mess? And from my little ant hill it's the economically unproductive people in society that mean all out income tax revenue is speant before it's even earnt in a year. By economically inactive I mean the people who could be but chose not to be. Deciding you are better off on benefits is a choice, as you are not forced into it.

 

Declaration of personnal stand point - I am big (make that very big) on personnal responsibility.

[torledo]

Torledo, interesting viewpoints here.

 

Out of interest (and I am interested) why do you consider redistribution an important element?

 

 

because it's fairer. you have to have some way of ensuring that too big of a wealth and income gap does not open up.... looks like allocation of government spending [fiscal policy] and taxes are the way to do that.

 

i could not be more opposed to flat taxes or tax cuts for the wealthy. although it's only human nature to believe that the more you earn the less you think should be clawed back in taxes.

[Dos_Box]

because it's fairer. you have to have some way of ensuring that too big of a wealth and income gap does not open up.... looks like allocation of government spending [fiscal policy] and taxes are the way to do that.

 

i could not be more opposed to flat taxes or tax cuts for the wealthy. although it's only human nature to believe that the more you earn the less you think should be clawed back in taxes.

 

And who decides what is 'fair' and what is 'unfair'? In some cultures it is considered fair that heives have their hands chopped off or that you can be flogged for chewing gum. Simply declaring something to be fair only makes it so from the standpoint of the proclaimer. Is it 'fair' that others should support someone who could work but chooses not to as it is easier to take your money than to earn their own.

Also remember this about government spending. The govt has no money. It does not own, earn or produce money. It takes our in the form of taxes. Every time the govt declares an increase in spending in a certain area it has to gather these monies from us, the tax payer, which is how we ended up in the mess we are now in. The prevoius govt spent, spent and spent again, and then began to spend what they didn't have and couldn't gather through taxes.

And the govt we have now? Well, they are the nasty medicine we have to take the morning after 13 years at the Labour party.

Edited November 24, 2010 by Dos_Box

[torledo]

And who decides what is 'fair' and what is 'unfair'?

 

i don't think the system is particularly unfair on high earners. Especially if we were to compare income taxes levied on high earners in the US and UK today compared to some of the draconian higher rate taxes implemented in the same countries through the 60's and 70's. Which i think another poster alluded to.

 

Where i think the problem lies is in outstide the PAYE system. tax rates seemed to be all over the place, and what of the enforcement of things like capital gains taxes, IHT etc. ? Is as much being collected from such taxes as should be the case.. don't know. Either way, it's unlikely to be the state benefit dependant who gain the most from lower tax rates on capital and assets. Because in the main i don't reckon they have as much in the way of capital and assets!!!...