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..Posted by Helen Tonetti
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
too simplistic – for an economics Professor – you do a disservice to your discipline
That is not purely how it works – how does the final man earn his money; who owns the bar; etc
Economics like life does not exist in a bubble or the world you created here.
Simplistic models like the one you have created reduce economics and the political and economic discourse
1) The maths is incorrect 2+5+9+14+49 = 79. The bar owner would be £1 short.
2) Isolating tax savings is misleading. Where is disposable income taken into account?
3) If you apply the final logic to the initial situation, the richest person would leave irrespective of what he might gain from a reduction. Why should he be responsible for almost 60% of the bill in the first place?
4) People paying the highest taxes do benefit most from tax reductions and they are also the least affected by increases in tax.
5) A fairer solution would be for the 5th & 6th guys to pay nothing and the 7th, 8th, 9th & 10th save £4 each reducing their contribution to £3, £8, £14 & £55 respectively – which does give a total of £80.
Professor, that is just fantastic, just hope plenty of people read it, and hopefully UNDERSTAND IT!
Philip, Jim & Mark
Many thanks for your comments. Appreciated.
Will Corry
The rich man had been paying for the drinks because he had employed the others on low wages, exploiting their labour. He decided to retire to the Maldives and thus did not turn up again.The other men decided to carry on the business as a co-operative and were thus able to pay for their own drinks.