## Tuesday, June 15, 2010

### Beer and Tax

Someone sent me this:

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 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.

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

Today's shorts:
Warrior Wongs WAG (nymag)
Blair Bungs Bureaucrats (taxpayersalliance)
More Cheating Newcits Style (hedgefundsreview)
Starbucks Lattes Hedgies (telegraph)
Anarchy in the PIGS (dailymail)

Today's longs:
Hedgie Goes Dutch (globalpensions)
UK Tax To Reach 100% (ft)
The Conference Nobody Goes To (ftalphaville)
Fintag Is Full Of Bllushti (allaboutalpha)
Hedge Fund Trading Strategy Based On Vuvuzela Noise (finalternatives)

Moan:
BP is an American company (well about 40% - State Street, Goldman Sachs et al) and the spill was caused by outsourced American companies. Us Brits are totally innocent and Obama is destroying American pension funds who invest in BP and being nasty. As I predicted when he was elected, the man is a one term president who will make Jimmy Carter look like Bill Clinton. I mean, comparing BP to 9/11 is an insult to George Bush.

Odds:
BP to be the best bargain of the year 4-1
BP to go the way of Enron 3-1

Corp Tax said...

Buy BP at 3.2...should see a bounce off that technical level.

Good tax example and I agree with you about CGT on 2nd homes. But it will never happen as property speculation is the past time of the middle classes and aspirational types in the UK

Anonymous said...

The tax example is flawed. In the UK only high-income people are taxed. The truly wealthy and the corporates are not taxed.

Ms Robinson said...

@anon. Agree. In Australia at one point I was paying 60 cents in the dollar top rate, while Mr Alan Bond was getting away with it all. I think it's changed a bit now but the UK is exactly like that.