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Brilliant Analogy about Taxing the Rich Watch

1. Hi all,

I just noticed this awesome (and quite relevant to students ) analogy on one of my friends' Facebook profiles, so I thought I'd share it with TSR. I'll spoiler it as it's fairly long.

Spoiler:
Show
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 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.

EDIT: The following video is essentially the above text and was found by Ralph Lauren, so for those of you, who don't want to read the long passage, you can watch this short video.

Thanks!
2. (Original post by thegodofgod)
Hi all,

I just noticed this awesome (and quite relevant to students ) analogy on one of my friends' Facebook profiles, so I thought I'd share it with TSR. I'll spoiler it as it's fairly long.

Spoiler:
Show
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 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.
It's been done. Some will understand it. Some will not. The ones that don't understand it are the ones that are holding this country back.

The country has reached a tipping point where the number of people dependent on the state's largesse is about to outstrip the ability (or willingness) of the contributors to support them.
3. (Original post by MatureStudent36)
It's been done. Some will understand it. Some will not. The ones that don't understand it are the ones that are holding this country back.

The country has reached a tipping point where the number of people dependent on the state's largesse is about to outstrip the ability (or willingness) of the contributors to support them.
Indeed, this country in particular is in a dire situation, which we need to get out of asap.
4. Flat tax is fair tax.

Socialists can go cry in the corner.
5. (Original post by Joeman560)
Flat tax is fair tax.

Socialists can go cry in the corner.
Interesting, what rate of taxation would you propose?
6. (Original post by thegodofgod)
Hi all,

I just noticed this awesome (and quite relevant to students ) analogy on one of my friends' Facebook profiles, so I thought I'd share it with TSR. I'll spoiler it as it's fairly long.

Spoiler:
Show
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 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.
Hey OP. Here's a video on the topic that you could put into the original post. I'm guessing it will draw in more of those who are repelled by article-long analogies.

7. (Original post by Ralph Lauren)
Hey OP. Here's a video on the topic that you could put into the original post. I'm guessing it will draw in more of those who are repelled by article-long analogies.

Thanks a lot, you're brilliant - I'll edit this video into the OP!
8. (Original post by thegodofgod)
Interesting, what rate of taxation would you propose?
I'm no economist so this is probably a bit shoddy.

Start at 30% (include national insurance in that) and gradually lower it over a period of time as the private and public sectors adapt to it. Hopefully it would end up around 20-24%. Increasing the size of the private sector through industry should allow the lowest paid to come out of tax altogether.
9. (Original post by Joeman560)
I'm no economist so this is probably a bit shoddy.

Start at 30% (include national insurance in that) and gradually lower it over a period of time as the private and public sectors adapt to it. Hopefully it would end up around 20-24%. Increasing the size of the private sector through industry should allow the lowest paid to come out of tax altogether.
But isn't the point of a flat rate tax that everyone pays the same proportion of their income as taxation? How, then, would the lowest paid come out of tax - isn't what you're suggesting essentially what we have in the UK right now?
10. (Original post by thegodofgod)
But isn't the point of a flat rate tax that everyone pays the same proportion of their income as taxation? How, then, would the lowest paid come out of tax - isn't what you're suggesting essentially what we have in the UK right now?
Yes, flat tax is when people pay the same percentage, but it would be cruel and uncivilized to tax the poorest who are already struggling as it is. What we currently have in the UK is: the more you pay, the higher the percentage. eg. £20,000pa pay 25% and 11% NI, £200,000pa pay 50% and 11% NI.
11. (Original post by Joeman560)
Yes, flat tax is when people pay the same percentage, but it would be cruel and uncivilized to tax the poorest who are already struggling as it is. What we currently have in the UK is: the more you pay, the higher the percentage. eg. £20,000pa pay 25% and 11% NI, £200,000pa pay 50% and 11% NI.
Hmm, so would you suggest having 0% tax until, say, £15000, and then 25% on any income of £15000 and above?

I suppose that would help some of the tax avoidance and evasion, but of course not all.

Oh and by the way, I think NICs are something like 11% until a certain weekly income limit, after which you pay 1 or 2% on everything above the limit - i.e. it is a regressive tax.
12. (Original post by Joeman560)
Yes, flat tax is when people pay the same percentage, but it would be cruel and uncivilized to tax the poorest who are already struggling as it is. What we currently have in the UK is: the more you pay, the higher the percentage. eg. £20,000pa pay 25% and 11% NI, £200,000pa pay 50% and 11% NI.
I'm really against this whole idea of completely taking people out of taxation. I completely understand that people are suffering and it's hard enough as is without the government pinching the little you have. But isn't that the whole point of a percentage-based taxation: that if you have very little, you will only be sacrificing very little? Obviously, that little may be more decisive for you than another person's contribution.

But that is the key word for me: contribution. Everyone contributes what they're able to, and takes out what they require to get by. To take someone out of taxation is to say you are so poor, you cannot contribute to society; to me, it's patronising and only reinforces the whole "scroungers" nonsense.

Everyone has their worth. No one should be told they have nothing to offer and are reliant on the rest of society.
13. (Original post by tc92)
I'm really against this whole idea of completely taking people out of taxation. I completely understand that people are suffering and it's hard enough as is without the government pinching the little you have. But isn't that the whole point of a percentage-based taxation: that if you have very little, you will only be sacrificing very little? Obviously, that little may be more decisive for you than another person's contribution.

But that is the key word for me: contribution. Everyone contributes what they're able to, and takes out what they require to get by. To take someone out of taxation is to say you are so poor, you cannot contribute to society; to me, it's patronising and only reinforces the whole "scroungers" nonsense.

Everyone has their worth. No one should be told they have nothing to offer and are reliant on the rest of society.
I don't think many people care about "contributing to society", they just want as much money as possible.
14. To generate the same amount of revenue, wouldn't we have to flat tax people about 50% of their earnings anyway?
15. Well put together video but you can't really compare a huge economy to ten blokes drinking a bar.

I think to say you either understand it or you will never understand it is incorrect.

Theories and hypotheses obviously don't always translate directly into real life situations,

The blokes at the top probably made all their money from the labour of the ones not paying any tax at the bottom anyway.

Furthermore the blokes at the top would obviously just go to a different bar with relative ease in the example given, this isn't always the case in the real world. Most people (even millionaires) wouldn't move country just to be marginally more wealthy.
16. (Original post by AeneasBK)
To generate the same amount of revenue, wouldn't we have to flat tax people about 50% of their earnings anyway?
I think it would be much less than that, probably around the 25-30% mark. There are millions of people who do not pay anything in income tax as a result of earning less than the personal allowance limit, which is £9440 this financial year. If the flat tax were brought in, all of these people would pay billions, as opposed to the 0 tax, which they currently pay. Nevertheless, you have to consider living costs and therefore this would just be unfair to the poorest.

However, from anecdotal evidence, it seems that the rich are the ones who avoid tax the most frequently, as they are the ones who have to pay the majority of their income as tax.

I personally think the best solution to this problem would be to lower taxation rates overall, whilst closing tax loopholes and ending the culture of making tax 'donations' to HMRC, which has been shown recently by multinational companies such as Starbucks and Google. By lowering tax rates, you are encouraging companies to pay what they owe, as there is less of an incentive to reduce their tax liability. Additionally, by lowering their tax liability, they have more money left over, which means they can invest more capital into increasing employment and R&D, which, ultimately, is going to benefit the economy and help reduce the national debt through increased revenues from income tax overall.
17. (Original post by thegodofgod)
I think it would be much less than that, probably around the 25-30% mark. There are millions of people who do not pay anything in income tax as a result of earning less than the personal allowance limit, which is £9440 this financial year. If the flat tax were brought in, all of these people would pay billions, as opposed to the 0 tax, which they currently pay. Nevertheless, you have to consider living costs and therefore this would just be unfair to the poorest.

However, from anecdotal evidence, it seems that the rich are the ones who avoid tax the most frequently, as they are the ones who have to pay the majority of their income as tax.

I personally think the best solution to this problem would be to lower taxation rates overall, whilst closing tax loopholes and ending the culture of making tax 'donations' to HMRC, which has been shown recently by multinational companies such as Starbucks and Google. By lowering tax rates, you are encouraging companies to pay what they owe, as there is less of an incentive to reduce their tax liability. Additionally, by lowering their tax liability, they have more money left over, which means they can invest more capital into increasing employment and R&D, which, ultimately, is going to benefit the economy and help reduce the national debt through increased revenues from income tax overall.
I don't know, lets say as a massive over estimate, that there are 5 million people not paying any tax at the moment, because they don't earn enough. IF we were to flat tax them 25% of their sub 10k earnings that's at a maximum 2.5k per person = 12.5 billion revenue from them.
If there's 1 million people earning ON AVERAGE 200k+ by only taxing them 25% and not 50%, we lose 50 billion revenue from them.

That's not looking into all of the people between 20k and 200k and how much less they would be contributing...

I'm not an economist and I'm only in this thread to expand my understanding I'm not here to correct anyone else's. Just thought I'm throw that in, in case anyone gets cagey or defensive.
18. (Original post by AeneasBK)
I don't know, lets say as a massive over estimate, that there are 5 million people not paying any tax at the moment, because they don't earn enough. IF we were to flat tax them 25% of their sub 10k earnings that's at a maximum 2.5k per person = 12.5 billion revenue from them.
If there's 1 million people earning ON AVERAGE 200k+ by only taxing them 25% and not 50%, we lose 50 billion revenue from them.

That's not looking into all of the people between 20k and 200k and how much less they would be contributing...

I'm not an economist and I'm only in this thread to expand my understanding I'm not here to correct anyone else's. Just thought I'm throw that in, in case anyone gets cagey or defensive.
Although that's theoretically correct, do you really think that big companies and high net worth individuals don't use accountants to reduce their tax liability?

Do you remember how much Jimmy Carr paid last year as income tax? £30k tax out of an income of £3m, which is 1%. If he hadn't used any tax avoidance schemes, he would have paid £1,478,126.00 in income tax and £63,337.36 in NIC, coming to a grand total of £1,541,463.36, which is equivalent to 51.4% of his annual income.

However, if the tax rate was lowered to, say, 20%, do you think he would have paid more tax? I think so.

I'm also no economist, but I understand that big companies are the employers of millions of people and we need more people entering employment. Therefore, I feel we need to be more competitive in terms of taxation for big companies and high net worth individuals.
19. So essentially the argument for flat tax is that if we tax people too much they won't pay it?
20. OK - this analogy is just the worst. It's intellectually lazy and doesn’t link up to reality at all.

1. In what pub does a barman decide to reduce prices by 20% whilst delivering the same number of pints? In reality, a 20% price cut means a 20% reduction in beer. This scenario, played out in reality, means the poorer guys at one end of the table stop receiving any beer at all whilst the top contributors still get their usual full pint and pay less for it. You can debate the merits of that, but when ‘beer’ equates to food, water, and accommodation, we get an image of a nasty and selfish society.

2. The point of a redistributive taxation system is that it helps people get on their feet during tougher times. Your analogy assumes every man's place in the line and every contribution is static. In fact, a social security net is there to acknowledges that one man might be paying little or nothing at some point, but once he strikes a good job he pays his share back three years later. The really rich guy might go bankrupt, in which case he gets the pints bought for him. Assuming that peoples positions are fixed and they can’t better themselves is fundamentally anti-capitalist.

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