(Firstly, anyone who remembers Clarissa explains it all – that’s where I nabbed the Hannan bit from)
On to the crux of the story – over at Dan Hannan’s blog, he explains why tax cuts are bound to favour the rich, courtesy of “a distinguished constituent” of his.
I’d like to take this opportunity to also say, I don’t agree with Hannan on everything. Fiscally, I tend to, and have just bought a copy of his and Douglas Carswell’s book “The Plan” – I also agreed with his assessment of Gordon Brown in the European Parliament. I don’t however, subscribe to the notion that the NHS should be binned off.
With that said, I give you, storytime…
Suppose that every day, ten men went to the pub, and drank exactly £100 worth of ale among them. If they paid their bill the way we pay our taxes, the breakdown would be roughly as follows:
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 contentedly together in the saloon bar until the landlord, meaning to be helpful, presented them with a dilemma.
“Gentlemen,” he said, “you’re my best customers. To show you how much I appreciate your trade, I’d like to give you a discount. From now on, I’ll knock £20 of the total bill for your drinks”. Drinks for the ten men would now cost just £80.
The group wanted to carry on splitting their bill in the way that we pay our taxes. So, obviously, the first four men, those least well off, would continue to enjoy free beer. What, though, of the other six? How could they divide the £20 discount in such a way that everyone got his fair share of the windfall?
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.
So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, following the principle of the tax system they had been using. This is how the bill now looked.
The fifth man, like the first four, now paid nothing (100 per cent saving).
The sixth now paid £2 instead of £3 (33 per cent saving).
The seventh now paid £5 instead of £7 (28 per cent saving).
The eighth now paid £9 instead of £12 (25 per cent saving).
The ninth now paid £14 instead of £18 (22 per cent saving).
The tenth now paid £49 instead of £59 (16 per cent saving).
Each of the six was better off than before. And the first four continued to enjoy free booze. But, as they left the pub, the men began to compare their savings.
“I only got a pound out of the £20 saving,” declared the sixth man. He jabbed an accusing finger at the tenth man,”Why should he get £10?”
“Too 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 two measly quid? The system is rigged in favour of the toffs!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. It’s always the worst off who get neglected by the politicians!”
The nine men dragged the tenth into the carpark and gave him a thorough kicking.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had their beer without him. But when the bill came, they found that their money didn’t even cover half of it.
There is, of course, an argument for cutting tax in a way that disproportionately favours the poor: a rise in thresholds, for example, aimed at ending the disincentives that trap people in the squalor of dependency. Norman Tebbit, our newest Telegraph blogger, makes precisely that case here. The point is that any general tax cut – reducing income tax, lowering VAT, scrapping taxes on savings or inheritance – is bound to favour, in absolute if not relative terms, the people paying the most already.
Of course, if your objective is equality rather than prosperity, you can design a fiscal system around the expropriation of the tenth man. But, as in my constituent’s little parable, he is unlikely to hang around waiting for you to apply it. In fact, the chances are that his house in Belgravia is already on the market.
