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