Tax system in the UK – is this a good representation?

Does this fairly reflect the current UK tax system?

I spotted this summary of the UK tax system recently on propretytribes and found it really quite interesting.

uk tax system

UK tax system – pint by pint

Suppose that every day, ten men go out for beer and the bill for all ten comes to 100 pounds. 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 pound
  • The sixth would pay 3 pounds
  • The seventh would pay 7 pounds
  • The eighth would pay 12 pounds
  • The ninth would pay 18 pounds
  • The tenth man (the richest) would pay 59 pounds

So, that’s what was 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.

 

Then came the tax breaks…

“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by 20pounds″. Drinks for the ten men would now cost just 80 pounds.

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 ? How could they divide the 20 pounds windfall so that everyone would get his fair share?

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 pounds instead of 3 (33% saving).
  • The seventh now paid 5 pounds instead of 7 (28% saving).
  • The eighth now paid 9 pounds instead of 12 (25% saving).
  • The ninth now paid 14 pounds instead of 18 (22% saving).
  • The tenth now paid 49 pounds instead of 59 (16% saving).

 

Then came the fighting…

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 pounds saving,” declared the sixth man. He pointed to the tenth man,”but he got 10 pounds!”

“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 pounds back, when I got only 2 pounds? 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, April 2012)

 

Discussion

For me, its a little over-simplified, but does show some significant flaws in the system and higlights how the tax system restricts and discourages individuals to grow their wealth.

So, what do you guys think? Is this a fair representation of how the UK tax system works?

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