Taxation vs the pub analogy - a cut-out-and-keep guide

24 April 2009

When you're an adult, complicated stuff is meant to be easy to understand - at least, that's what we're led to believe as children. The truth of the matter is that no matter what your age, two topics remain impenetrably convoluted - relationships, and taxes. There's sod all you can do about the first, but at least you can pay somebody to sort out the second. Actually. Hang on a minute.

As far as those taxes go, Wednesday's budget raised a few eyebrows (though none as menacingly defined as Alistair Darling's) when it was announced that earnings over £150,000 would be subject to a whopping 50 per cent taxation. Those for the decision believe that anybody earning over £150,000 can easily afford to do so; those against say it provides a) little incentive for individuals to better themselves or their prospects and b) every incentive to live in another country.

We've seen this analogy on several blogs, but nobody has claimed responsibility for writing it, despite it been regularly attributed to a number of professors on the subject.

Not that we're capitalist pigs or anything, but it's a useful way of understanding the fundamentals, even if you don't agree with it's tone. That said, anybody who kept drinking with the BW team night after night for free would get a good shoeing sooner or later. You've been warned:

"Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. 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 pays £12;
  • the ninth would pay £18;
  • and the tenth man, the richest, would pay £59

"That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement --- until one day, the owner threw them a curve (in tax language, a tax cut).

"'Since you are all such good customers,' he said, 'I am going to reduce the cost of your daily meal by £20. So now dinner for the ten only cost £80.00.

"The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six--the paying customers? How could they divvy up the £20 windfall so that everyone would get his 'fair share?'

"The six men 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 end up being PAID to eat their meal. So the restaurant 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:

  • as before, the first four men paid nothing;
  • now the fifth man also paid nothing;
  • the sixth man now paid £2;
  • the seventh paid £5;
  • the eighth man paid £9;
  • the ninth man paid £12;
  • leaving the tenth man with a bill of £52 instead of his earlier £59

Each of the six was better off than before. And the first four continued to eat for free.

"But once outside the restaurant, the men began to compare their savings. 'I only got a pound out of the £20 reduction,' declared the sixth man, but he, pointing to the tenth. 'But he got £7!'. 'Yeah, that's right,' exclaimed the fifth man, 'I only saved a pound too; it's unfair that he got seven times more than me!'

'"That's true,' shouted the seventh man, 'why should he get £7 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. The system exploits the poor!'

"The nine men surrounded the tenth and beat him up.

The next night he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were now £52 short of paying the bill.

And that, boys and girls, journalists, and college instructors, is how the 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 at the table anymore."

TOPICS:   Banking   Tax

13 comments

  • Deepz
    Dinner for 10 cost £80 so dinner for 9 should cost less.
  • Paul S.
    Well done. You've solved the recession.
  • How H.
    [...] that are driving this economy to do better for themselves. I found very nice analogy here and here. Nobody seems to be claiming responsibility for writing it but it very nicely describes how taxes [...]
  • BowtNetterToDo
    Your story assumes all 10 men ate exactly the same portions, when in fact the first 4 men had only a bread stick, while the 10th man ate 90% of what was placed on the table. In reality the 10th man was heavily subsidised.
  • Jill
    An interesting way of describing it. However, I don't think a tax rise like this will persuade many to leave the country, bearing in mind the first £150k are still at the previous rates.
  • epicfail
    " 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; " If only - in this society the poor pay a higher proportion of tax than the rich/tenth man.
  • ada
    In the analigy you should reference it. eg. the four poorest being those on state benefits etc....
  • ada
    response to DEEPZ,,, fine knock £20 off the rest, of the men are still short of £32 pounds.... and BOWTNETTERTO DO,,, missing the point
  • bykergrove
    bownettertodo - you are wrong mate. the 10th man sends his kids to private school, pays for his own health care, pays for his own house, pays more for his flashy cars, pays more council tax for the same service ect.... so the true analogy is that the people that pay nothing get driven to the restaurant and the guy that pays the most doesnt even get a chair to sit on.
  • bykergrove
    epicfail - my taxes each year amount to some peoples salary, so that means that it would take 5 average earners (simplifying it so they pay 20% tax on average) to pay the same tax that i do. there were shows on tv where it proved that some people were better off living on benefits than actually going to work. I believe that if you are able bodied then you shouldnt have access to shit!
  • CheesyMonkey
    Worst.Analogy.Ever. If they paid their bill the way we pay our taxes, those who ordered the most food would pay the largest share back. If the Tenth Man decides not to 'show up at the table', noone will need to pay for his extravagant meal. Therefore, why is the bill still as high? We SHOULD pay our bill (when in a party) like we pay our taxes - each person pays for what they ordered. In reality, most of us just split the bill between the people there, regardless of what's been ordered.
  • CheesyMonkey
    "epicfail - my taxes each year amount to some peoples salary, so that means that it would take 5 average earners (simplifying it so they pay 20% tax on average) to pay the same tax that i do." So what of it? The average wage is approx £25k. If you're paying this much in tax, you can obviously afford to do so. I can't believe someone is actually COMPLAINING that they earn too much money. Listen pal - we'll switch jobs and you can be 'happier' knowing you're only paying a one-fifth of the tax you were before.
  • BowtNetterToDo
    The 'pub analogy' is wrong and you have to be steaming drunk to not notice why. The fact is the 10th man pays the same percentage of VAT on his meal, school fees, healthcare, flashy car, and mind numbing alcohol as the other 9 men. Isn't the point of the analogy to highlight and explain the difference in percentage paid on earnings related tax and not purchase tax ?

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