Friday, June 08, 2007

Tax Cuts Explained

Thanks to Sarkis Zeronian for this. I shall be distributing it to the Shadow Cabinet. Joke!


Because it is tax season. . . Let's put tax cuts in terms everyone can understand. 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. "Because 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 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 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 roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid £2 instead of £3 (33% savings).
The seventh now pay £5 instead of £7 (28% savings).
The eighth now paid £9 instead of £12 (25% savings).
The ninth now paid £14 instead of £18 (22% savings).
The tenth now paid £49 instead of £59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. "I only got one pound out of the £20," 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 than I!" "That's true!!" shouted the seventh man. "Why should he get £10 back when I got only two? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The 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 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 college professors, is how our tax system works. The people who pay the highest taxes 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.


Anonymous said...

They're a pound short after the reduction.

Anonymous said...

I don't understand. Are you saying the Government is spending our money on beer?

The Hitch said...

Does this apply to private equity fund managers (ronnie cohen) who apprently pay less tax than thier cleaners?

Newmania said...

Visit Hatfield Girl

Three men go into a hotel and want to get a room . The cashier tells them its £30 and they give him £10 each. When they have gone the cashier realises he has over charged them and the room is actually only £25 ,. He chases after but on the way realises he might as well make a profit so instead of telling them its £25 he tells them the room is £27 . As they have paid £10 each he gives each man £1 so they have paid £9 each and outs the spare £2 in his pocket.

The men have paid £29 and the man has £2 in his pocket

That does not add up to the £30 .

Where is the missing £1

Newmania said...

What has happened here are we doing moderation again then ?

Ed said...

Why would it be a joke to point that out to the Shadow Cabinet?

Harry said...

Yes, but who believes that there's any demand overseas for the 'talents' of most of the highly-paid twerps?

vote freedom said...

I think you will find though in reality it is the other way around. The poorest pay the largest proportion of their wages. Yet the richest in society normally pay nothing at all because they can afford to employ people to get them out of paying taxes.

So if everyone did pay the taxes they should yes it would true. But ask why in most cases a millionaire can sometimes have a smaller income tax bill than a middle income worker on 50 grand a year.

And when you go down the scale. It was Mr Brown who stung everyone earning less than 18 grand. A point which was suitable for tory use when they attacked him.

I suggest you stop whinging and start paying.

I notice for all the tory complaints on how Brown has ripped off the pensioners that the Tories havent said once that they would re-peel anything done by Brown.

machiavelli said...

Surely that £20 would be returned in the form of tax credits, but to the poorest 4 who paid nothing in the first place?

Actually, the landlord would probably pay them £10 each, realise his mistake, and then demand a fiver back off them once they'd already spent the money on pork scratchings.

Colin D said...

If only I could afford to drink that much. Still the illustration is rather good, but it leaves out the spongers, who I will not name for legal reasons. But harrods & BHS do have a certain ring to them.

Ed said...

The poorest pay the largest proportion of their wages.

Higher proportion of their own income maybe, but not a high proportion of the total tax take.

Tax avoidance by the rich and failure to declare income by the poor is another issue entirely!

Newmania can I have a plug instead?

Anonymous said...

Newmania, the men have paid £27, surely.

Anonymous said...

PS The answer is that the amount he has "left" after over-charging them is irrelevant.

vervet said...

I'm with Ed on this one .... exactly why would i be a joke to point that out to the shadow cabinet ?

Anonymous said...

Earth to Newmania(verity in disguise). The men have paid 27. If the guy on reception has 2, then there is a pound left over somewhere. Wakey wakey.

Steven said...

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.

It doesn't really work like this at all does it?

The poorest pay the largest proportion of their wages.

The poorest pay the largest proportion of their wages.
The poorest pay the largest proportion of their wages.

The poorest pay the largest proportion of their wages.

Jeremy said...

Hitch, that private equity managers and their cleaners stuff sounds like rubbish. I'd be amazed if their average rate of tax was less than their cleaner's, let alone the absolute amount.

Anonymous said...

If the 10th man hadn't stolen their land, property and resources in the first place the other nine wouldn't need him in the first place.

Anonymous said...

Why a joke? That script plus a box of Etonian matches might just do the trick.

Barbara-Ann said...

The lesson I take from this is....Don't cut taxes as it helps the rich and causes inequality and resentment.

Iain, is that what you intendend??!?!? and when are you leaving the Tory Party?

english democrat said...

Would not a simple 10% flat tax with no exemptions(everyone pays)be a lot fairer? If you have a UK passport you pay the 10% or the passport gets taken away! As everyone pays then there is no room for whingers or jelousy! No tax credits and a time limit(5yrs) on benefits and NO VAT!
Oh dear you ask where would the money to run the government come from? Well im glad you asked! Sack ALL the freeloading parasites that infest local/central government/toy parliament(EU) and make them get a real job! and only keep the bare minnimum staff to provide basic services. In other words there are too many chiefs and not enough Indians(not meant in a racist way)living high on the hog whilst the peasants work harder and get less and the chiefs get fatter and lazier!
And last but not least, stop all foreign aid and give it to our own needy.

Roger Thornhill said...

Newmania, the story is wrong:

The Men pay £30, the clerk realises it is £25, pays them back £1 each (£3 in total) and pockets the £2.

The men pay £27 (3x9), the man keeps £2.

It is not a "missing £1" as it is not 27+2=29 (missing £1), but £27-£2 = £25, which is in the till.


Roger Thornhill said...

Oh, and btw, good post Iain. How about this as a Tax Ad from 18DS?

Observer said...

Of course if you have Roman Abramovitch round for drinks he gets his beer free do quite a few extraordinarily rich men with offshore accounts....

Ed said...

Steven if the poorest pay the highest rates of tax, why don't you go and ask that nice Mr Brown to do something about it?

C4' said...


Adrian Yalland said...

Sorry - what was the story again!

There is a dilemma with our tax system.

It's probably true that, as a proportion of income, the lower earners pay a high percentage of their wages in tax, but a high percentage of not very much is still not very much. And besides, they get a lot of it back through the benefits system.

But, the wealthy, who pay a smaller proportion of their income, contribute a larger amount because a little of a very great deal is actually quite a lot. Then, they are less of a drain on society because although they pay for the NHS, they rarely use it as they all have private health insurance.

The poor buggers in the middle are the ones which get my sympathy. They pay less in percentage of income than the poor, but they don;t get it topped up with endless benefits. Yet, they probably pay not a lot less in real terms than the really wealthy who earn much more.

Then, they usually have to subsidise their kids mortgage (or help with the deposit), whilst paying for their parents care-home fees, whilst saving for their own pension as well!

And then, the day in the year when you stop working for the Gordon Brown and start working for yourself is getting later and later.

The overall point is, we are ALL paying too much tax, and until people stand up and remind the social workers who run the country that it is actually our money, they will continue to steal it from us gunpoint, and waste it on their own pet projects!

Anonymous said...

Facile, specious and superficial.

If you are thick enough to believe this crap then you shouldn't be allowed to vote.

CCTV said...

Anonymous said...

Facile, specious and superficial.

If you are thick enough to believe this crap then you shouldn't be allowed to vote.

June 08, 2007 5:20 PM

Thank you for explaining why it is you are disenfranchised and nameless

Anonymous said...

Steven said:

The poor pay the largest proportion of their wages.

Here are just two of two of many real examples from a real payroll which don't support that claim:

A, works part-time for 1.75days per week:

Gross Pay: £230
Total Tax & NI: £37.68
Deductions % = 16.38%

B, works full-time for 5 days per week:

Gross Pay: £733 +
Tax & NI: 197.22 = 26.9%

Concerned about how A and partner and child managed on A's part-time pay, I offered A a full-time position. But A didn't to work full-time. So I explained to A about tax credits.

Well, the thing is, A said, I'm not supposed to be living there...

Scary Biscuits said...

Under Gordon's tax credits the system is as follows:
The poorest six pay £2 each, plus VAT plus beer tax, making a total of £3 each. All of them, however, are entitled to tax credits enabling them to 'get back' some of the money that wasn't theirs in the first place. Unfortunately, as a result of the Government's literacy improvement programme, 3 of this group are functionally illiterate and cannot fill in the 200 page form. This means that the richer half of this group (the ones that can read) actually pay less than the poorer ones. When the bar owner reduces the price the Government denounces this as an unjustified windfall and demands that the group pay the extra £20. As the rich man then dies in a dirty hospital ward from Clostrium Difficile, each poor person then has to pay £10 each (plus VAT plus beer tax) to make up the loss to the Government. This the poor people do quite happily by borrowing on their credit cards.

W G Gruff said...

The analogy is a better example of just how the disproportionately high earnings of the top 10% (actually 5% but there are not twenty men in the party) of income 'earners' skews the average of all of them. The average bill of each (his income) is £10.00 but in reality the poorest four only earned about £2 - £3.00 before the minimum wage and don't earn much more than £6.00 now, and they pay tax and NI contributions on that. The poorest nine in the party cannot possibly have been able to afford quite as much beer as the richest one and have nothing to be thankful to him for. Number ten's wealth is derived from the other nine and if he has to pay a bigger bar bill he has nothing to complain about.

As we who are poor know, there is no such thing as a free beer, regardless of who is running the pub.

Harry said...

This may amuse you - from the Prof's website:

'Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics." Additionally, he does NOT know who wrote it.'

mark williams said...

The story may be true in the US where US citizens and resident alients are taxed on all of their worldwide income, but it doesn't really apply here, where resident aliens are only taxed on income remitted to the UK, where high earners are able to use readily available tax shelters to shelter theirn tax liability on earned income, and ewhere highly paid foreign footballers are able to divert lots of their earnings offshore as payments for "image rights".

Oh and if Ronnie Cohen isn't paying less tax than his cleaner, jhe needs a new accountant.

Anonymous said...

Woops, sorry I messed up my A & B examples, earlier, but you get can still get the gist.

In the real world Factors such as benfits, huge tax free expenses and pensions for politicans, tax avoidance schemes for the rich, tax and benefits fiddles, shifting patterns of cohabitation, the black and criminal economy all undermine much of the received wisdom on proportionate taxation.

G Eagle Esq said...

Dear Iain

Well explained

Yr obedient servant etc


Anonymous said...

The tenth now paid £49 instead of £59 (16% savings).

The following day, the tenth, a nulab Minister, smiled to himself as he mulled over his beneficence in subsidising his friends at the pub on the previous evening.

He was still smiling as he bought his duty free drink and cigarettes in the HOC bar, totted up his tax free housing, transport and other expense claims for that year and glanced at the latest forecast of his huge tax free pension.

Flipping 'eck, he muttered to himself, only £200,000 pa pension! That won't sustain me lifestyle. Better tell Gordon to increase MP's pensions - he can always recoup it by adding another 30p tax to booze and fags.

Anonymous said...

Ah, but where is the line between poor and paying tax? It's too low, there are POOR people paying far too much tax.

ezra said...

Iain, you should remove the credit to Dr. Kamerschen, he did not write this -

Indeed, this is a bit like the time you posted that urban myth of a radio interview -

Doesn't say much for the accuracy of the blogosphere, does it?

Trumpeter Lanfried said...

What a dreadful, convoluted mess we have got ourselves into, piling one refinement and complication onto another. Our tax system has become like the Schleswig-Holstein Question which only three men ever understood.

The remedy: flat rate tax acros the board for rich and poor alike. Then no-one would have any legitimate cause for complaint, and tax revenues would rise, as they always do when taxes on the rich are reduced.

Moreover, if we all had to pay 10%, across the board, people who fiddled their tax, whether in the boardroom or on the building site, would be held in contempt. As it is, we all turn a blind eye to tradesmen's little fiddles because we all, secretely, think we pay too much tax.

Anonymous said...

"In fact, they might start drinking overseas where the atmosphere is somewhat friendlier."

or more likely where their daughter will get raped in broad daylight, their wife will be mugged and their son will develop raging AIDS after his forst cuple of sexual encounters - and nothing will happen because he hasn't paid the right people the right kickbacks.

Rush-is-Right said...

Anonymous said..(10.48)
"In fact, they might start drinking overseas where the atmosphere is somewhat friendlier."

....or more likely where their daughter will get raped in broad daylight...

Er yes. And that couldn't possibly happen in the UK could it?

Andy D said...

'Ah, but where is the line between poor and paying tax? It's too low, there are POOR people paying far too much tax.'

But they get most of it, and then some back via tax credits. If they got rid of tax credits, then they could put the Personal Allowance up to about £10k, instead of the £5k it is at the moment and be tax neutral. (Using £10k as an example, no idea if it is that).

In my opinion, if you're on minimum wage, then you probably shouldn't be paying any tax. Get rid of the tax credit system, save millions in the admin of it all and keep the system as simple as possible.

If you're concerned about higher earners saving too much tax, then fiddle the National Insurance for higher rate tax payers.

Newmania said...

Something the Conmservative Party has to understand is that the country has moved Left and grumble aside is very happy for the state to take on more functions than a market solution dor all set of Policies will sustain.
Tax cuts cannot be on the agenda for now .Cameron has it right

Trumpeter Lanfried said...

newmania [11.44 AM] No, the country has not moved to the left. As always, people want it both ways. Much higher state spending and much lower taxes.

Iain Dale said...

Ezra, I will indeed remove the reference. But frankly I don't care who wrote it. It's the point it makes which is important.

Newmania, you are wrong. If we want small government, then lower taxes are part of that.

hafod said...

smaller government means fewer services, despite all the guff about "cutting waste". What services should the Tories cut once in power, Iain? Disability benefits, pensions, tax relief for low-paid families, single parents?

Nobody has mentioned that there is a flat rate tax in existence - VAT - for rich and poor. That's why the poor get stung the most in terms of taxation.

ezra said...

Iain, I'm not disputing whether the point is valid. But from his website, it seems Dr Kamerschen is keen not to be associated with this text. And by wrongly attributing it to him , it lends the text a false air of authority.

mark williams said...

hafod: What services would the Tories cut?

Let's start with ID cards, and take it from there.

The Remittance Man said...

I beat you to this by a couple of weeks - I claim my 5 pounds :-)

The Remittance Man said...

ps With maths like that I might be tempted to say Newmania is actually the Chancellor of the Exchequer