Thought I'd post this here. (It's obviously not 100% accurate, but gives the basic jist of things)
The tax system explained in beer!
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 problem.
"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 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 roughly the same amount, and he proceeded to work out the amounts each should pay.
* And so the fifth man, like the first four, now paid nothing (100% savings)
* The sixth now paid £2 instead of £3 (33% savings)
* The seventh now pay £5 instead of £7 (28% savings)
* The eighth now paid £9 instead of £12 (25% savings)
* The ninth now paid £14 instead of £18 (22% savings)
* The tenth now paid £49 instead of £59 (16% savings)
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
"I only got a pound out of the £20," 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 £1 as well.
It's unfair that he got ten times more than I!" "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. The 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 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 is how our 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 any more. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible
Now who's round is it ?????
Your analogy is far too simple to impart any useful wisdom.
Let me try another analogy. There's a grocery store with an "entry tax" of £3 and a 10% "food tax" on the value of the goods bought (i.e. the initial cost before deductions). You only have to pay 20% if you earn less than £150 per day, 50% if you're between £150 and £500, and 100% if you earn £500 or more.
So four three four-person families (food bill of £100):
Person A has an income of £100 per day, buys £100 worth of food, pays £3 in entry tax, £10 on the food tax, but only has to pay £20 on the food. Total bill: £33.
Person B has an income of £300 per day, buys £150 worth of food, pays £3 in entry tax, £15 on the food tax, but only has to pay £75 on the food. Total bill: £93.
Person C has an income of £1000 per day, buys £200 worth of food, pays £3 in entry tax, £20 on the food tax, pays the full £200 on the food. Total bill: £223.
As a percentage of their income, Person A spends 33% on food, Person B spends 31% on food and Person C spends 22.3% on food.
Question 1: is this a fair result in taxation?
Situation A: Let's say a government comes in and starts subsidising food bills. It is now 15% for the poorest, 40% for the middle, 80% for the richest.
The revised costs are:
Person A: £28 (28%) - reduction of 5%
Person B: £78 (26%) - reduction of 5%
Person C: £183 (18.3%) - reduction of 5%
It costs the government a total of £60 to do this for these three people.
Situaton B: Let's say that instead of subsidising the food bill, they got rid of the "entry tax" and the "food tax".
The revised costs are:
Person A: £20 (20%) - reduction of 13%
Person B: £75 (25%) - reduction of 6%
Person C: £200 (20%) - reduction of 2.3%
It costs the government a total of £54 to do this.
Question 2: Which of the two situations above is preferable?
The reality of it is that we have to pay for the state through taxes. We can do this either through "progressive" taxes (such as income tax), where the cost of the bill is dependent on your income, or we can do it on the basis of "regressive" taxes (such as VAT and council tax), where there is a much flatter rate, which is not linked to income and the richest pay a significantly lower percentage of their income on this. The "regressive" taxes bump up the poorest in society's tax bill so much, that the poorest pay a much bigger percentage of their income on tax than the richest, as seen in the initial situation above, where the "entry tax" and the "food tax" bump up Person A's tax bill so much that they pay a much bigger percentage of their income on tax than Person C.
So when we talk about tax breaks, cutting income tax for the richest always causes issues for the poorest. Situation A cost £60 to implement, with £40 of these savings going to Person C. The state then needs to be shrunk by £60, and this affects the poorest more so than the richest. However, if we cut the regressive taxes, such as the "entry tax" and "food tax", with a similar kind of outlay by the government, the poorest benefit much more. Aside from this, when the richest get savings on their tax bill, this money is generally saved. The richest do not live paycheck-to-paycheck like the poorest do. When the poorest get the money back, this money is reinvested in the economy. So there is an economic benefit to cutting regressive taxes too.
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