18 November 2010

Beer and an Economics Lesson

Suppose that once a month, ten men go out for beer and the bill for all of them comes to £100. If they paid their bill the way we pay our taxes and claim State benefits, 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.And the tenth man (the richest) would pay £59.

So, that’s what they decided to do. The ten men drank in the bar every month and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your weekly 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 not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.

So the bar owner suggested a different system. The fifth man, like the first four, now paid nothing.The sixth man paid £2 instead of £3 .The seventh paid £5 instead of £7.The eighth paid £9 instead of £12.The ninth paid £14 instead of £18.And the tenth man now paid £49 instead of £59. Each of the last six was better off than before with the first four continuing to drink for free.

But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” declared the sixth man. He pointed to the tenth man, “but he got £10!”

“Yes, that’s right,” exclaimed the fifth man. “I only saved a £1 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 only got £2? The rich 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!”

So, the nine men surrounded the tenth and beat him up. Funnily enough, the next month the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came to pay for their drinks, they discovered something important – they didn’t have enough money between all of them to pay for even half the bill.

That’s how our tax system works. The people who already pay the highest taxes do tend to get the most benefit from tax reliefs and reductions. Tax them too much, attack them for being wealthy and they just might not show up anymore.

PS - But then an Eastern European guy turns up in the bar flashing wads of cash. He says he's just come over on the back of a lorry with his wife but has left his fifteen kids at home on the family farm. He says he gets so much money to pay for a house, for not having a job, for being injured so he couldn't work even if he found a job, and to cap it all his wife gets Child Benefit for their fifteen kids even if they are being fed and housed back in their home country. He cannot believe his luck so buys everybody a drink!   

PPS - apologies for the rogue formatting of the text - good old Google again I'm afraid.

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