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Taxes explained in the bar

I received an email with this great story which you may have seen but, just in case, is worth sharing here.

How do taxes work?

Suppose that once a week, 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.

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 week 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 realized 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 that it would be fairer to reduce each man's bill by a higher percentage. They decided 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 (a100% saving).

The sixth man now paid £2 instead of £3 (a 33% saving).

The seventh man now paid £5 instead of £7 (a 28% saving).

The eighth man now paid £9 instead of £12 (a 25% saving).

The ninth man now paid £14 instead of £18 (a 22% saving).

And the tenth man now paid £49 instead of £59 (a 16% saving).

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!"

"Yeah, 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 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 week 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 to pay for even half of the bill!

And that 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 might not show up anymore.

In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

… maybe we should remember this when we talk about punishing investment bankers for getting big bonuses*?



* oh, forgot to mention, most investment bankers are paid via Cayman Islands and Monaco, so no taxes paid**


** oh, forgot to add, that most other investment bankers are non-domiciled in the UK of course, so no taxes paid


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • alex

    I don’t know how is it in UK, but in Macedonia >>>most<<< of the tax revenues come from VAT which is paid equally by everybody when they buy something (5% for necessities (milk, bread, drugs and similar) and 18% for everything else). Personal income tax of 10% covers a very small proportion of the tax revenues.

  • Chris Skinner

    Thanks Alex
    I’m moving to Macedonia!

  • Chris Yaldezian

    In other words, Chris, its too late, the 10th man has already left the bar. So, I guess that the other guys will go out and find Mr 10, and beat up him again, what have they got to lose. 🙂

  • Dennis

    I don’t know what is exactly the situation in Macedonia, but most jurisdictions with VATs allow businesses to offset their VAT paid against VAT collected. In Canada the result is that wealthier people do most of their consumption under the umbrella of their business operations to avoid the VAT. This includes the range from the biggest operators down to sole proprietors.
    In effect, a VAT brings the Cayman Islands home. ;o)
    I agree entirely with the point of Chris’ article (as usual). It’s a cruel twist how people who are getting something for nothing start to think they are being disadvantaged if the tax system goes easier on those who actually pay.
    Maybe Ayn Rand needs to become required reading in our school system. ;o)

  • Chris Skinner

    Thanks Dennis
    Here in the UK we were going to make Ayn Rand required reading in all schools … but the State blocked it.