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View Full Version : Tax cuts - the pub/restaurant analogy

StaceyF
25th Apr 2009, 16:34
Never seen this one before, quite interesting:

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. This crappy 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.

corsair
25th Apr 2009, 17:55
That would be all very well if it was true. The little allegory is flawed in almost every aspect. I suspect a more clued up person will turn up and explain it better later. But I would suggest that in fact the people proportionally paying the most tax would be the five in middle ground. There would not be as many a four poor men, more like one. Thus giving us eight non rich tax payers. Most tax comes from middle income earners not rich people. There are simply more of them. It also depends on how you define 'rich'. Some of the middle income earners could easily be defined as rich by others at the bottom of the scale.

The suggestion from this little tale is that the 'rich' person pays more tax than all the others combined. Clearly that isn't true in real life.

I agree with the sentiments of the tale though. Over taxing people doesn't raise more income other than on a short term basis. It's counterproductive. But the politicians always fall into the same trap over and again. When will they learn?:ugh:

Beside it's likely that the rich man in the story is their boss and would have paid for the meal anyway.:p

Andy_S
25th Apr 2009, 18:32
The biggest flaw, surely, is that the 10 men got a 'tax cut'. If this was analagous to reality, the greedy resturant owner would have put the price of the meal UP - and suggested that tenth man, being rich, should absorb the whole price difference.

RJM
25th Apr 2009, 18:33
Same as the four politicians at the next table dining on their taxpayer funded credit cards.

25th Apr 2009, 22:41
And with the current mess we're in, soon 7 will be unemployed and hence unable to pay, the 10th will have scarpered to Monaco, leaving 8 and 9 to pick up the new tab of 160 quid!

Airey Belvoir
26th Apr 2009, 03:10
I'm confused :confused:. At what point does the polly get the rebate for buying the porn flicks??

Don Coyote
26th Apr 2009, 07:29
Still don't see why the 4 poorest should eat for free, they could at least wash the dishes!

ORAC
26th Apr 2009, 09:49
Tax Incidence: regressive, proportional and progressive taxes. (http://www.itepnet.org/pb23inc.pdf)

The most regressive tax in the UK? - Council Tax. (http://bracknelllibdems.org.uk/news/000068/council_tax_has_more_than_doubled_under_labour.html)

The one that lost Thatcher her job for trying to replace it with a, progressive, Poll Tax.

Go figure. :hmm::hmm:

Whirlygig
26th Apr 2009, 09:55
ORAC, have you got that the right way round?

Cheers

Whirls

Whirlygig
26th Apr 2009, 11:33
From a fairness perspective, there are three broad types of taxes. A regressive tax makes
middle- and low-income families pay a larger share of their incomes in taxes than the
rich. The sales tax change shown in the table on the previous page is a regressive tax
increase, falling most heavily on low-income taxpayers. A proportional tax takes the same
percentage of income from everyone. A flat-rate income tax is proportional. A progressive
tax makes the wealthy pay more of their income in tax than those with lower incomes.
Increasing a graduated personal income tax would be a progressive tax change.

In the light the above, how was Poll Tax a progressive tax if everyone was paying exactly the same amount irrespective of income?

Cheers

Whirls

max1
26th Apr 2009, 12:13
If it was just blokes, all the blokes know that you just divide the bill by 10, round it up for a decent tip, throw in your cash and move on to the pub/casino.

If it was 10 sheilas, they talk about who had the Tirasamu for dessert, who didn't drink, who had an entree, and buggerise around for ages. Finally they put in amounts from \$13.85 (diet!) to \$31.45 , because they all really agree that the service wasn't that good and a \$3 dollar tip is more than adequate.

Then one of the girls wants to put it on her (husbands) credit cards (so she can pick up the shopper points). The next day the girls that also really wanted to put it on their (husbands) credit card ring around and complain about the tight-fisted one ('who they actually really like') who picked up the shopper points (that they would never do).

Don't lets get started if it is a BYO (Bring Your Own) and the girls hook in about the \$8 bottle of wine the 'Point Nicker ' brought whilst wolfing down the \$35 bottle of South Australian Shiraz from the other end of the table.
But you still love them.

They then regale their other halfs about what a great night they had except for the incidents stated above. The other halfs try to nod understandingly whilst trying to read the paper.

Wives try to quiz the husbands about the dinner with friends they had. 'Yeah it was pretty good'. (Stuffed if I remember, I was pissed before I got to the restaurant, but the bank statement says I spent \$80 at the bottle shop before the restaurant and took \$300 out at the Casino).

Lucky they don't want to look at the bank statements!

Metro man
26th Apr 2009, 13:48
In return for paying such a large share of the bill you would think that the rest of the diners would look after the rich man ie. insist he was served first, got to choose the wine, sat at the head of the table, got the first taxi that turned up when they left.

If they kept increasing his proportion of the bill and expected him to eat less, who would blame him if he decided to eat elsewhere. Plenty of good restaurants around who would love to have him as a customer.:hmm:

StaceyF
26th Apr 2009, 14:53
Tax Incidence: regressive, proportional and progressive taxes. (http://www.itepnet.org/pb23inc.pdf)

The most regressive tax in the UK? - Council Tax. (http://bracknelllibdems.org.uk/news/000068/council_tax_has_more_than_doubled_under_labour.html)

The one that lost Thatcher her job for trying to replace it with a, progressive, Poll Tax.

Go figure. :hmm::hmm:

The problem with the Poll Tax was that the legislation to enforce it was poorly thought out and, consequently, flawed.

My brother-in-law, for example, earns enough that his wife doesn't need to work. The political picture repeatedly painted by the Tories was that this tax was fairer as it was a **personal** tax, not a property tax.

And they reiterated this argument time and time again.

But when my brother-in-law asked what would happen if his wife (who had no income of her own) refused/couldn't pay the tax, he was told in no uncertain terms that the legislation was watertight; an attachment of earnings order for his wife's debt would be applied to his income.

But if it's a personal tax...... :confused::confused::confused:

airship
26th Apr 2009, 15:17
The suggestion from this little tale is that the 'rich' person pays more tax than all the others combined. Clearly that isn't true in real life. This view is apparently supported by what Robert Peston had to say at 11:16 UK time, Friday, 24 April 2009 (http://www.bbc.co.uk/blogs/thereporters/robertpeston/): According to the Treasury's figures, £7bn will be raised by 2012/13 from three raids on the rich: the new 50% tax rate for those earning £150,000 and above; the tapered reduction of tax relief on pension contributions to 20%, again for those whose incomes are £150,000 or more and the abolition of tax-free allowances for those earning £100,000-plus.
In respect of the hole in the public finances, the better-off are being asked to make a disproportionate contribution. But £7bn won't go anywhere near to closing a gap between the government's income and expenditure, which is currently running at £175bn...
...But the Treasury believes that the yield from the 50% rate will be just £2.4bn because high earners will adjust their behaviour in ways that mean they avoid incurring all the increased liability. (Emphasis added)

All the latest 'tax the rich' measures when properly considered in the context of the overall amount of tax collected in the UK as shown below, are nothing but a whitewash accompanied by the smell of politicians hopelessly pandering to the unwashed...?! :sad:

http://newsimg.bbc.co.uk/media/images/45674000/gif/_45674755_spend_tax466x243.gif

But going back to StaceyF's analogy for a moment, here are a few facts which were not included originally:

About the 10th, (or richest diner): He's actually the beneficial owner (through various discreet and / or offshore entities) of the building in which the restaurant itself is located. And the restaurant's major suppliers of wholesale foodstuffs. Owns a chunk of the bank that loaned the restauranteur his initial startup capital secured by a 1st lein on the restauranteur's home. And even a chunk of the bank that set up the original mortgage that financed the purchase of that home. On the way to the restaurant, his Gulfstream V executive jet (fuelled with duty-exempt Jet A1)had made several short stops, in Washington and then London, where he'd negotiated several billion dollars in taxpayer-financed zero-interest rate loans for his companies. At the restaurant itself, and unknown to the other diners, he alone was served the "Shepherd's pie" made entirely from specially-imported Argentinian beef, all ingredients having been certified bio, whilst diners #6-9 opted for the specially-imported wild-boar roast plat du jour (diner #10 just happens to own a grand estate bordering on Chernobyl...). Everyone else opted for 'BSE-free' steak & chips. At another table in the same restaurant, he noticed a group of MEPs in which he had an interest, and was hardly surprised to overhear that the EU might soon allow restaurants to apply a 5.5% of lower VAT rate instead of the much higher rates currently applied. Not that any of that largesse would ever be reflected on the final bill, some of it would go towards subsidising higher (if not quite decent wages yet for workers in catering), but most of it would allow him to increase rents and prices to restauranteurs. In any case, the restaurant bill (just like the Gulfstream, limos etc.) could all be offset as legitimate business expenses.

About diners #6-9: one whom was an MP, another an accountant and the last, a union official. None of whom ever suspected that they might have been even indirectly employed by diner #1. Having said that, I'm pretty sure that the MP must have been aware that the rent-free villa on the French Riviera he was allowed use of regularly might also have been the same villa at which his 18 year old daughter had spent a few weeks with her latest 'secretive' lover (the 'heart-shaped' pool in the photos looked very familiar...).

I could go on, but isn't it all almost eerily-strange (even reminiscent) of how you could easily interchange diner #10 (the richest diner) with say any high-ranking official in a post-Stalinist regime for example?! :} :zzz: