This is the best explanation of the effect of reducing tax rates for the rich(36 Posts)
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.
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
Worth thinking on, definitely.
Although, of course , the Tories effectively raised the top tax rate to 45% form Labours 40% that they held for 13 years until weeks before the last election. The rich pay more income tax now than under 13 years of Labour.
So where do non doms fit into that then?
Non doms own the bar but don't drink there
I like the analogy, and I agree with the economics of it, but I don't think it's entirely fair.
It implies that the poorest men are getting a pretty sweet deal. They're drinking the same beer in the same pub as the rich guy and are doing it for free.
I think people in this country are getting pissed off because amongst other things, the nhs and welfare state are being eroded to such a level that we're seeing a huge rise in poverty and social inequality, whilst at the same time we're seeing tax breaks for the very rich. We are not all drinking at the same watering hole by any stretch of the imagination.
Trying to portray everyone on the lower end of the socio-economic scale as bitter and jealous of the financially successful is a bit simplistic IMO.
breadrocks said what I was trying to say but more articulately and much less sweary
I would support a system where everybody paid the same amount of income tax. I don't think people should be punished for earning a high salary.
Yes, it implies the poor do fuck all and get the same as everyone else.
It's a bit of a shit analogy. Yet typical of an economist.
Also the whole "beat up the rich dude". FFS
Like that ever happens.
I got bored half way through despite my tax qualifications and couldn't follow it at all.
It is something used to get students to think critically, not a thought through economic philosophy.
And yes, it's nonsense. No one gets anything for free in life.
In this analogy the rich man might end up keeping his money but he's lost his friends.
I would support a system where everybody paid the same amount of income tax. I don't think people should be punished for earning a high salary
Like the poll tax, you mean? After all, that went well.
1 of the poor men was homeless - high rents and limited supply of housing was a factor in that.
1 of the poor men had actually been given his beer in a package from the foodbank. He would have spent any increase in his income on necessities and so boosted the consumption part of aggregate demand so boosting the economy.
1 of the guys on a 'middle' income could only afford to be there because he was spending the non-means tested child benefit he receives.
The very rich man paid a higher proportion of tax and gained the most after the tax cut but he really didn't need the extra money and saved in anyway...in an offshore account; so a leakage from the domestic economy.
As a previous poster said...it is an aid to students understanding one view of economics. All economics' students (even at the very beginning of their studies) would be expected to critique it.
A totally flawed analogy because:-
'Beer' - or economic goods - are made by the poorest. But the profit is creamed off and retained by the wealthiest.
The wealthiest only buy the beer of the poorest once the poorest have generated the wealth for the richest.
And, by the way ... beer cannot be compared to the necessities that people need to survive and live.
If the government only provided one service and everyone benefited equally from it then yes, it would be a good analogy, but governments provide many services and not everyone partakes of them equally so then this becomes a not very good analogy.
To make it more accurate, the poorest person would have a drop of beer in his glass, the richest man would have an entire brewery to himself.
Any...er...evidence thay this analogy accurately represents the situation that would develop if the tax rate was increased for high earners. Data? Numbers? Or just feelings.
David Kamerschen didn't write that and doesn't know who did, according to the Snopes link that 26miles linked. I've seen this before, wrongly attributed to a different economist.
So glad people have come and said what I've thought, far more eloquently. Not a fair analogy at all.
Yeah the end of that story the rich guy doesn't get beaten up
He goes home and masturbates into a pile of 50's while being fed grapes by the 4 poor men
That's more like the metaphorical reality.
The bar owner was wrong - since the total bill was reduced by 20%, each person should have reduced their contribution by 20%. They would all have been paying the same proportion of the total as before, and all would have paid less, therefore the likelihood is that they would all have viewed it as fair.
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