A trip to a Parisian bar highlights how the tax system really works?

Written by Andrew Sykes, director of biz4Biz and RHG Insurance.

In October 2013 the IMF published a report, Taxing Times, which recommended that countries should consider curing their economic woes by taxing their citizens more. The IMF suggested higher taxes on income, wealth and property: a strange recommendation given the state of the economy in France, which has raised taxes on businesses and wealthy people, and yet is now facing a triple-dip recession.

President François Hollande was swept into power on a promise of higher taxes to support the welfare state and pay off the deficit. However, raising taxes on the rich to a punitive level to fund public services rarely works, as I hope this amusing anecdote below illustrates.

Once a week, 10 men go out for beer in Paris and the bill for all of them comes to 100 euros. If they paid their bill the way we all pay our taxes and claim state benefits, it would go something like this;

The first four men (the poorest) would pay nothing. The fifth would pay 1 euro.
The sixth would pay 3 euros. The seventh would pay 7 euros.
The eighth would pay 12 euros.
The ninth would pay 18 euros.
And the tenth man (the richest) would pay 59 euros.

So, that’s what they decided to do. The 10 men drank in the bar every month 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 euros.” Drinks for the 10 men would now cost just 80 euros.

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-euro windfall so that everyone would get his fair share? They realised that 20 euros divided by six is 3.33 euros, 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 a different system. The fifth man, like the first four, now paid nothing. The sixth man paid 2 euros instead of 3 euros. The seventh paid 5 euros instead of 7 euros. The eighth paid 9 euros instead of 12 euros. The ninth paid 14 euros instead of 18 euros. And the tenth man now paid 49 euros instead of 59 euros. 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 got only 1 euro out of the 20 euro saving,” declared the sixth man, pointing to the tenth man, “but he got 10 euros!”

“Yes, that’s right,” exclaimed the fifth man. “I saved only 1 euro too. It’s unfair that he got 10 times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get 10 euros back, when I got only 2 euros? The rich 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!”

So, the nine men surrounded the tenth and beat him up.

Funnily enough, the next week the tenth man didn’t show up for drinks (he was probably on the first Eurostar train to London), so the nine sat down and had their beers without him. But when it came to pay for their drinks, they discovered something important – they didn’t have enough money between all of them to pay for even half the bill.

That’s how our tax system works.

The people who already pay the highest taxes do tend to get the most benefit from tax reliefs and reductions. Tax them too much, attack them for being wealthy and they just might not show up anymore.

François Hollande deliberately raised taxes on businesses and the wealth generators to preserve public spending and cut the deficit. Looking at the state of the French economy, where the state has grown to 55 per cent of GDP, and at the lack of public confidence in François Hollande’s policies, it clearly has not worked.

And if that is not bad enough, Mario Draghi, the head of the European Central Bank, said the French government should stop relying on tax increases to lower the deficit.

This should be a warning to Britain. With an election due in 2015, it is important that the British electorate does not fall for the socialist mantra of “tax the rich” currently being espoused by the IMF and the trendy left-wing press.

Voters only have to look to France to see the results of a high-tax socialist regime in action – high taxation damages the economy and drives the wealth creators away.

François Hollande may have done David Cameron a favour: Cameron can go into the next election with Britain’s economy growing and employment at an all-time high, which has been achieved by improving Britain’s competiveness through reductions in government spending and the burden of taxation on businesses and wealth creators. And with France’s economic woes, he can point out what happens when taxes are too high – who knows, he may even be able to cut income tax before the next election.

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