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Marks and the tax system explained in beer

The following explanation of the tax system has been popular for many years, and in his latest memo released yesterday, Oaktree's Howard Marks quotes it and says,

"I've been waiting a long time for a chance to use this. The numbers may not be exactly right but the idea is. The unarguable bottom line is that everyone's view of the fairness of the tax system - like most such matters - depends largely on the angle from which you look at it."

Here is an example of the beer explanation:

"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 (a 100% 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 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 might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier."


February 03, 2019

What about the family trust guy, with a couple of kids (tax mules) over 18 at uni?

Rick Maggi
February 03, 2019

...I’d bet the Venezuelan version of this story would be much day two the beer would cost £500 and the tenth man would have fled overnight to Panama. The end.

Ramon Vasquez
February 03, 2019

Would it not be fairer to scrap the current system altogether ,
and start afresh with one based on a percentage of one's salary for every one , plus a GST based on a sliding scale upwards from basics to extreme luxury ?

Would such be too difficult to implement ?

Ramon .

Ian A
February 03, 2019

Somehow he needs to work the Cayman Islands into this story...for completeness...

Jacquie Hayes
February 03, 2019

What an appropriate description of the Australian tax landscape. It’s a shame our politicians seem incapable of laying things out for taxpayers so clearly. It might save some grief.

Carikku de Roo
February 01, 2019

Love this

February 01, 2019

That’s not how progressive tax works. IF you want to pay me a $1 million a year and tax me 70 cents in the dollar for anything over $500,000 I guarantee I’ll still turn up for work. Out of the goodness of my heart. Lol

Graham Hand
February 01, 2019

OK, let's keep the discussion constructive. Some of the comments are not adding to the debate and are too personal and party-political.

Over it
February 01, 2019

The next chapter...

...And the first five enjoy the free beer so much, they keep drinking, and drinking until there is no beer left.

It’s ok though, because the bar owner can create a beer levy for the tenth guy to fund further brewing. They can then charge the tenth guy to drink the freshly brewed ale.

Pat, spoken like a true free loader, who wants someone who he despises, and is jealous of, to pay for his beers.

February 01, 2019

There is a difference.

In the story the tenth man is giving more beer for the greater good without expectation of something in return. He is a good bloke and it is completely wrong to bash him.

In the tax system he is paying a due to maintain the society that allows him to generate wealth in the first place, either directly or indirectly for his business or workers. You know, education, health care, infrastructure, security etc. He may not always like how it is spent but he would be less likely to do as well or be as happy without it.

The story misses the first part and so implies that the wealth was provided directly by God and none of those things was needed in its creation. The ‘heavy lifters’ as Paul calls them are not the nurses and teachers and countless others but simply those that amass wealth.
- a great test if you have it.

In the story, the tenth man leaves and the rest drink less beer. In the tax system the tenth man (not always but often) hires a ‘good’ accountant and pays less tax than the fifth man and sees no issue.

In cases like negative gearing he does it by (mostly) creating nothing and receives a tax benefit for losing money while hoping to make a bigger benefit from capital growth where he gets another discount. Very heavy lifting that is.

The tenth man should understand the difference between value creation and value extraction, but he often doesn’t and so complains when rents are taken away and doesn’t understand why others may be upset with him for using his wealth to protect these rent seeking activities.

In those cases if he still want to take his ball and bat and leave, he should go because others will come and use those resources to create wealth in his place.

El Ricardo
February 06, 2019

Well said Pablo - the beer analogy totally ignores that #10 is the only one with the financial capacity to pay for "manipulation" of the system to end up paying little or nothing for his beer!

January 31, 2019

Australia has become are country full of victims, whingers always expecting a hand out and crying it's just not fair.
We've come so far in such a short amount of time through people with strong work ethics who are prepared to take a chance.
So for everybody voting for Shorten there's a saying.
If you're over 40 and vote Labour there's no excuse for your stupidity.

January 31, 2019

Oh no, not that hoary old story again. That's being doing the rounds on emails between spotty libertarians since Adam was a cowboy. It's one of Donald Trump's favourite analogies, which should tell you something about how bone-headed it is.

January 31, 2019

Brilliant and fair analogy. We have to stop going after the heavy lifters who actually take risks and achieve something; for themselves and the economy at large. Sapping gov't pension payments is the last thing they want but maybe this is what Bowen wants; as well as diverting smsf money into union run industry funds.
Why isn't Bowen retrospectively getting rid of the ridiculously expensive and totally unfunded Defined benefits super he and his politician cronies will enjoy in retirement; irrespective of market conditions? There's the perfect honey pot but no he doesn't even mention what an unfair yet ongoing burden this is and will continue to be.

January 31, 2019

Send a copy to Shorten and Bowen! Not that they'd take it on board. Socialism's great until you run out of other people's money!!

January 31, 2019

Spot on James.

January 31, 2019

It would be good to see the same example in reverse - the beers now cost 120 pounds - more like real life. It might show that the poorest have the highest tax increase in percentage terms. The bar owner might suggest a consumption tax!

Z. Gregory
January 31, 2019

Oh dear.........beautifully explained!


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