How the British tax system works, in all its glory

[Speed Donkey]

Made sense to me, so should do so to just about anyone ells

Enjoy...

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, 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 and 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.

David R. Kamerschen, Ph.D.
Professor of Economics.

[Astra49]

Made sense to me, so should do so to just about anyone ells Enjoy...

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, 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 and 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. David R. Kamerschen, Ph.D. Professor of Economics.

I have just walked into my home after voting for our next State Governament in the state of Victoria, Australia. The above quotation is soooooo true.

Nothing changes it really does apply everywhere. We have been suffering the exedous of our brightest to other countries for some time now, mainly because of more lucrative wages, as we have been Union dominated for many years. Our economy at the moment has not suffered as much as most overseas countries during the last few years, mainly because of the mining boom we have in two States. This of course is dependant on overseas buyers, and this could change very rapidly.

I work and live in a blue collar dominated area and the above scenario is something I see every day I work. I have learnt never try to reason with people who do not understand the very basics of economics.

[justgin]

I agree with the professor! Sounds good to me!

[CodewordConduit]

http://davidk.myweb.uga.edu/

I heard one where the richest man was a banker - he took everyone's money to buy the round, got distracted by the fruit machine and lost the lot.

[Astra49]

Re: How the British tax system works, in all its glory http://davidk.myweb.uga.edu/

Very interesting!!! Pays to google.

[Rational Gaze]

I always thought the problem in British politics was that we only have two forms of government available to us.
1. We vote in the Conservatives. They make a ton of cuts. The economy will be stablised, but all the poor people get screwed over. The poor people get angry and then vote in the other option.
2. Labout get voted in. They make a ton of spending, and increase taxes for the rich. The poor become wealthier, but the rich people get poorer. The rich are angry they are having to give so much money for the government to waste, and so stop contributing to business, commerce, etc. This de-stabilises the economy, making everybody poor. We then go back to option 1.

The problem with option 1, is that it makes it intolerably hard for poor people. The problem with option 2 is that it ruins the economy.

I think what we need is a balance in between socialism and capitalism. The only truly free services a government should ever provide should be the armed services and the emergency services. Stuff like state benefits should be minimised/more tightly regulated. Anyone caught abusing benefits should either be deported or conscripted. In fact, punishments for crimes need to be much tougher, but criminals who can be rehabilitated should be. Although there are certain "crimes" which are not, and so should be made not crimes anymore. Such as self-defence. In Britain, if someone attacks you, and you fight back, they sue you and YOU get arrested.

The BBC should definitely be privatised, no questions asked. Why should I pay a TV liscence when I never watch BBC channels? I would rather have adverts than have to pay to watch TV.

[Tanakh Keeper]

"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, 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.

That is exactly how the US federal income tax system works as well. Statistics from the Internal Revenue Service have been fairly consistent for years.
The top 1% of income earners pay 40% of the total taxes.
The bottom 50% of income earners pay 3% of the total taxes.

Then I hear people complain that the rich get all the tax breaks. Well, Duh! The rich are the ones paying the majority of the tax bill. How is it logically possible that those that don't pay any taxes should get a tax cut?

[CodewordConduit]

That is exactly how the US federal income tax system works as well. Statistics from the Internal Revenue Service have been fairly consistent for years.

TK, it's an old internet meme of unknown origin that normally has $ instead of £. It's not especially representative of our (British) tax system at all.

[Rational Gaze]

Наш Coветский Союз покоряет весь мир как огромный медведь на востоке. Овцы бродят безцельно, без всяких забот. А Советский медведь на охоте. Наше братство - хорошая жизнь, Наша щедрость ни с чем не сравнится. Все кто с нами - сильны. Все кто против, держись. Чтоб нам всем не пришлось потрудится. Все народы, не стоит того. Что бы мы превратили вас в пепел. Благодарны вам, низкий поклон, От самой могущеcтвенной страна.

[Tanakh Keeper]

TK, it's an old internet meme of unknown origin that normally has $ instead of £. It's not especially representative of our (British) tax system at all.

I don't see why not. I just looked at the UK taxation for the first time on Wikipedia just now. Personal income taxation is at a graduated rate like the US, they just have fewer marginal rates. They have tax rates of 20, 40, and 50%, compared to our 10, 15, 25, 28, 33, and 35% tax rates.

http://en.wikipedia.org/wiki/Taxatio...United_Kingdom

[CodewordConduit]

I don't see why not. I just looked at the UK taxation for the first time on Wikipedia just now. Personal income taxation is at a graduated rate like the US, they just have fewer marginal rates. They have tax rates of 20, 40, and 50%, compared to our 10, 15, 25, 28, 33, and 35% tax rates.

http://en.wikipedia.org/wiki/Taxatio...United_Kingdom

The response was to your "exactly like ours" comment. Of course it is, it was based on yours and some clown replaced the currency symbol. If you want to say we both have a form of progressive taxation, fine.

However, the lack of more nuanced tax margins is an issue over here in and of itself - also the higest rate of taxation is levied on the poorest people, those who return to work for less than 16 hours a week and who are receiving benefits have up to 95% of their wages taxed. Rights and wrongs of this aside, it remains a fact.

Edit (source): "At the moment, there is a major disincentive in the system as the loss of benefits for those returning to work means that people may only gain 5p extra for every pound they earn. They lose the equivalent of up to 95 per cent of their earnings as their benefits are removed and they pay tax.

Under the new system, anyone returning to work is guaranteed to keep at least 35p of every pound they earn as their benefits will be removed more slowly..."

http://www.telegraph.co.uk/news/news...can-Smith.html


Yes, it's supposed to replace the benefit a person is on, but it is different presumably to what happens in the US, and it is taxation.

[Tanakh Keeper]

However, the lack of more nuanced tax margins is an issue over here in and of itself - also the higest rate of taxation is levied on the poorest people, those who return to work for less than 16 hours a week and who are receiving benefits have up to 95% of their wages taxed. Rights and wrongs of this aside, it remains a fact.

(snip)

Yes, it's supposed to replace the benefit a person is on, but it is different presumably to what happens in the US, and it is taxation.

Yes, this is a conceptual issue that also exists here. A person receiving benefits will presumably no longer receive those benefits when they are earning their own living. If their employment pays the same as the benefits, then the average person would have no reason (or incentive) to work. It is difficult to do a full comparison of benefits since a person can receive different benefits for different reasons from different jurisdictions. Some benefits may be permanent while others are temporary.

Let's zero in on the jobless benefits. In the US, the specifics of the payments and duration vary by state. Here in Florida, the maximum benefit is $275/week (177 pounds sterling). The maximum duration of the benefit is 26 weeks. The minimum wage in Florida is $7.25/hour or $290/week. Since the unemployment benefit is also subject to income tax, most people would realize a benefit to actually working instead of collecting unemployment benefits.

Your link didn't state if the UK unemployment benefit is limited in duration. However, the changes being proposed to end the benefit if people refuse to seek employment sounds like a good idea. Unemployment is supposed to provide sustenance while seeking a job. It should not be used to pay someone to avoid working.

[TyRockwell]

That is exactly how the US federal income tax system works as well. Statistics from the Internal Revenue Service have been fairly consistent for years.
The top 1% of income earners pay 40% of the total taxes.
The bottom 50% of income earners pay 3% of the total taxes.

Then I hear people complain that the rich get all the tax breaks. Well, Duh! The rich are the ones paying the majority of the tax bill. How is it logically possible that those that don't pay any taxes should get a tax cut?

Sheer profundity, and impeccable logic!