It’s election time again and people are flocking to social media for vindication of their views. I honestly thought I had learned my lesson from Brexit, this time I was hoping to stay well clear.
But then this story kept appearing on my news feed.
Based on the way it’s being shared and the comments I’ve read, people seem to think this story somehow justifies lowering taxes for the rich, and ultimately provides a reason to vote Conservative.
Read the story, then I’ll do my best to explain why it doesn’t.
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 curve ball.
“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 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 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 a higher percentage the poorer he was, 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 (100% saving).
The sixth now paid £2 instead of £3 (33% saving).
The seventh now paid £5 instead of £7 (28% saving).
The eighth now paid £9 instead of £12 (25% saving).
The ninth now paid £14 instead of £18 (22% saving).
The tenth now paid £49 instead of £59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
“I only got a pound 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 pound 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 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 new tax 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 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 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, attack them for being wealthy, and they just may 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.
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible
For the sake of argument, let’s assume that the figures in the story are accurate, that the richest one in 10 contributes 60%, and four in 10 people contribute nothing. (I suspect it’s nonsense but that’s irrelevant).
This story would have you think that we should be very grateful to this wealthy individual. After all, they’re paying our bills and we need to be very careful that we don’t scare them off, “they might start drinking overseas”. Maybe they even deserve a tax break?
Let’s just consider this one very wealthy individual for a moment. Where did they get their money? There are roughly 2 possibilities:
- They were given the money by somebody else
- They are unusually smart and driven to succeed
To put it another way. That individual has been dealt a good hand. They won the lottery of life. Either they were lucky enough to be born into a wealthy family, they will be rich without ever needing to lift a finger, or they won the genetic lottery and they have been exposed to just the right kind of experiences and opportunities that may lead one to accumulate wealth.
Either way, without a doubt, they were lucky.
They were given the money by somebody else
For every person that’s born a millionaire, many are born into poverty. It is only luck that the wealthy child who lives to inherit a vast estate, is not a starving child in Africa who dies of dysentery before their 3rd birthday. Neither child deserves more than the other.
How should we feel and respond to this billionaire child? Should we be grateful they exist, and give them a tax break?
They are unusually smart and driven to succeed
For every person that has an abnormally high IQ, who has an entrepreneurial spirit and is willing to take risks and keep trying, there are vastly more people that have none of these virtues.
Unfortunately, we don’t get to choose our brains, or the experiences that shape who we are. We don’t choose our parents, or the kind of education we receive. We don’t choose the encouragement and praise we receive as a child, or the abuse at the hands of those that raise us. Despite the illusion, we choose nothing.
We like to think that our destiny is in our own hands. It isn’t. We are quite literally a product of our genetics and our past experiences. We can change, only so much as we are motivated and capable – something we don’t choose either. You will likely only dispute this if you are one of the lucky few. It’s very easy to take personal responsibility for the good things that come naturally. It’s easy to blame those that do not share your virtues.
Given the right kind of brain, and the right kind of opportunity, some of us will achieve incredible things. Most of us won’t.
How should we feel and respond to those blessed individuals who fate has looked kindly upon? Should we be grateful, and give them a tax break?
A rare opportunity
In this election we have a choice. Never mind ‘strong and stable leadership’. For once, the choice is far more profound.
We can choose a Labour party that seeks to minimise the impact of luck. A new opportunity to address the vast inequalities that exist between the many and the few, and provide more opportunity for those that have been dealt a shit hand in life.
Or we can choose a Conservative party who seem to believe that only the rich can keep us rich. Policy should work for the rich, and the rest of us should be eternally grateful.
I appreciate that’s a crude analysis, but from my perspective I’ve touched on the core issue. The Conservative party are living a myth, a romantic view of the world where everyone is socially mobile and in charge of their own destiny. It resonates with those that are fortunate, but philosophically it’s crap.
And just to be perfectly clear – I consider myself as one of the lucky few. But I’m happy to contribute to a more equal and fair society, and I hope you will too.