# THE TAX SYSTEM EXPLAINED IN BEER.

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THE TAX SYSTEM EXPLAINED IN BEER.

When pondering the question of mining super taxes and the structure of our tax system in general please refer to this explanation using the language of Beer!!

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 dollar 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 dollar 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.

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THE TAX SYSTEM EXPLAINED IN BEER.

When pondering the question of mining super taxes and the structure of our tax system in general please refer to this explanation using the language of Beer!!

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 dollar 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 dollar 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.

sigh. simplistic. ever heard of tax minimisation? 75 of the top hundred richest people in the country paid an average of under \$2 in tax... google it... but they're taking 10% of the beer away from those who drink for free - bast***s!

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sigh. simplistic. ever heard of tax minimisation? 75 of the top hundred richest people in the country paid an average of under \$2 in tax... google it...

Haha, that craps funnier than the original joke Bob. Instead of googling kooky socialist sites try actual figures from the bureau of stats... or ATO

Minimisation (and we all do it) explained from 4:00

(Dunno who ASP are, no connection)

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Yes very simplistic and wrong. More like the bottom nine drinkers get a half a capful of beer and the top drinker get the rest of the barrell.

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Instead of googling kooky socialist sites try actual figures from the bureau of stats... or ATO

And yet the chart you provided was copied from a Conservative blog page rather than either the ABS or ATO websites !

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The data is from ATO, there are other chart versions of the same information out there.

To refute something you need to provide some countering evidence. Got data that shows the opposite? Let's see it.

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The data is from ATO, there are other chart versions of the same information out there.

So this http://www.smh.com.au/federal-politics/political-news/the-70-mega-rich-who-dont-pay-tax-20130506-2j3ng.html is equally valid since it is also based on ATO data.

To refute something you need to provide some countering evidence. Got data that shows the opposite? Let's see it.

I wasn't trying to refute anything - merely suggest, (not for the first time), that you heed your own advice about finding evidence on the web.

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75 of the top hundred richest people in the country paid an average of under \$2 in tax...

They should have been paid \$2, not have to pay it - The Government needs to support the rich in order that they can create and substain micro economies instead of punishing them for creating them.

But the poor won't support that because the rich are bad, they must be, they are rich after all and seeing that the majority of the people are poor they won't accept a Government that doesn't side with them, so the Government must be seen to be punishing the rich for being rich and in the end the poor simply get poorer - but they are happy because those rich bastards are getting punished.

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They should have been paid \$2, not have to pay it - The Government needs to support the rich in order that they can create and substain micro economies instead of punishing them for creating them.But the poor won't support that because the rich are bad, they must be, they are rich after all and seeing that the majority of the people are poor they won't accept a Government that doesn't side with them, so the Government must be seen to be punishing the rich for being rich and in the end the poor simply get poorer - but they are happy because those rich bastards are getting punished.

The bottom line of your first comment being, that the businesses with which they are involved tend to pay lots of both tax and wages. Yes and amen.

Your second comment, re Aussie perceptions of financial elitism, can stand for itself - an element of that attitude is manifest, although there are other factors of course.

I suggest that neither the ethos nor the fiscal sense of adjusting the private-government financial relationship such that the change takes, proportionally, more from the poor than the less poor, appeals. In gross terms the saving is small, and in proportionate terms if the saving were spread as an equal proportion of income over the whole spectrum, the more wealthy (or higher turnover) individuals would not have a diminished quality of life. Combining the farcical exaggeration of the budget "emergency" - what we have is an attitude problem that has directed the economy in a long-term unsustainable direction - with a non-egalitarian tightening of belts, there are a lot of wounded sensibilities.

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To the person who posted the joke and everyone who agrees with it -

what an absolute crock of sh1t.

The Gina's, Clives & Twiggy's of this world would not create more jobs if we were to let them pay less tax (which would be impossible when they pay f--- all in the first place). They would simply make more profit, which goes to them and the shareholders, few of whom are poor. When you have to pay the rent while on \$207 a week (unless you're under 30 on the Libtard's new plan, in which case you have to pay it while getting nothing), you're likely to have other priorities than buying shares.

As for the crap about them going elsewhere, fat chance. While there's minerals/gas/coal/oil under the ground there will always be someone wanting to dig it up. If the Australian public had've been smart enough to back Rudd's original super profits tax instead of being bluffed by the howls from the right and those poor miners, who spent \$20m on an advertising campaign (which they probably claimed as operating expenses for tax purposes), there wouldn't even be an imaginary budget emergency.

I listened to one radio announcer praising Twiggy Forrest for donating \$63m to Western Australian universities. He said he'd worked out that it was 6 week's wages for Twiggy, and wouldn't it be good if everyone could donate 6 weeks wages to a good cause.

News flash. If 63 mill is 6 week's wages, that still leaves Twiggy with almost half a BILLION dollars income. Twiggy could probably still afford the mortgage, put food on the table and send his kids to school with that. What David R. Kamerschen, Ph.D. and every other Neo-con out there doesn't seem to realise is that the price of something doesn't change depending on your income. If Twiggy went and bought a house in the 'burbs of Melbourne or Sydney for half a million, he's using 1/966th of his annual salary to do so (after his generous one-off 63mil donation, of course). If Joe Average on \$70k a year is buying that house, IF he can save a deposit and get a mortgage, it's over 7 times his annual salary. Same goes for every necessity of life - food, shelter, education, health.

Without getting too socialist about it, how much is too much? When multi-nationals get so big and powerful that they can avoid paying tax at all by creative geographical placement of various parts of their operation (and creative accountancy), are they buying their share of the beer? When companies get around political donation limits by using their employees names to pay massive amounts to political parties (without expecting anything in return, of course) - is that good democracy? When the amount of money that one individual gets could fund the health care needs of an entire developing country, are they being paid a fair wage for their labour?

Meanwhile, the Libtards want to charge a co-payment for going to the doctor. \$7 doesn't seem like much. Unless you're a sole parent with 3 kids who are always sick, or need a blood test or x-ray along with your GP visit, or you're a pensioner already making the choice between eating and paying the power bill. But then again, basic humanity has never been a factor for neocons.

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Why do some people think that other people owe them a living? Instead of whinging about cuts in their social security benefits, they should get of their bum and get a job, any job.

I was a subcontractor for approximately 13 years, from time to time I ran out of work due to the downturn in the construction industry. The longest stint was approximately 4 months, did I ever get unemployment benefits ? Nope, so why should my tax goes towards giving money to a dole bludger?

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They would simply make more profit, which goes to them and the shareholders, few of whom are poor.

And they would create even more micro economies, only takes a couple of sales a year to keep a light plane company going for example. If it's not a plane then it's a boat or a motorbike or a car, house, furniture etc etc ... see what happened to the "little people" in 2008 in the USA when a lot of money was taken away from the wealthy folk ...

If they don't spend it then it stays in the bank, the bank loans more out on the strength of it creating even more economic windfalls for the general public.

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Why do some people think that other people owe them a living? Instead of whinging about cuts in their social security benefits, they should get of their bum and get a job, any job.I was a subcontractor for approximately 13 years, from time to time I ran out of work due to the downturn in the construction industry. The longest stint was approximately 4 months, did I ever get unemployment benefits ? Nope, so why should my tax goes towards giving money to a dole bludger?

It's not a living, it's survival. Don't know whether you can live on 58% of the minimum wage Dazza, I know I can't. As for you not claiming, that's your choice. You were probably entitled to it at the time. Do you go to Medicare to get a refund when you go to the doctor? What's the difference?

And they would create even more micro economies, only takes a couple of sales a year to keep a light plane company going for example. If it's not a plane then it's a boat or a motorbike or a car, house, furniture etc etc ... see what happened to the "little people" in 2008 in the USA when a lot of money was taken away from the wealthy folk ...

All good examples Bex, all involved with creating something. Manufacturing. How much of that do we do in Australia?

As to what happened to the "little people" in 2008, the crash was caused by some of those same unscrupulous and greedy "wealthy folk" when they decided that the best way to increase their wealth was not to produce or create anything tangible, but to create convoluted financial "products" that had at their base huge and unsustainable mortgages given to people who didn't have a hope in hell of repaying them.

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OK, so let's reason through that dog-whistle article a bit. Notice these mega-rich seventy are un-named and that the process by which they pay almost no tax is just mysterious, some black magic that their accountants did which the ATO is powerless against.

"70 Australians with incomes of more than \$1 million each in 2010-11 paid no income tax.The statistics released last week show that the 70 earned \$194 million among them but by the time their accountants had finished, that had been cut to less than \$20,000 in taxable income, or \$1 of taxable income for every \$9999 that went untaxed."

So their income wasn't actually "more than \$1m each" and an average of \$2.77m but less than \$20k each. So there are two possibilities here:

1) They have a large turnover but also high deductible expenses so they get to keep very little of the money they handle, so actually a low income. This happens to many businesses and sole traders, especially at the moment. The article states "Most of their tax liability was wiped out by deducting tax losses from earlier years" no crap - so they should pay tax on losses also? Does Fairfax do this?

2) The option that the hack journalist would of course like us to think is that these people are CHEATS by some mysterious un-known mechanisms that isn't available to average Australians. Somehow they can fiddle the negative gearing process or other deductibles and pay large sums to other companies like accountants which must somehow get back to their own pockets untaxed in ways the journalist is unable to explain to us. The obvious problem is that the ATO are apparently aware of what they are doing yet are not acting. In reality we know the ATO are actually pretty good at tracking this sort of stuff within Australia and watch the wealthy closely.

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Not black magic Gnu, legal loopholes. The ATO may be brilliant at tracking tax evasion but it can't do anything about tax avoidance.

The ATO can only apply the law. If the law is incomplete then any accountant worth their degree will find a way to get around it.

Glad you brought up negative gearing. How about the government hit that instead of the poor? Fat chance, some cows are sacred.

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Tax avoidance is illegal Marty and the ATO can very much do something about that. Tell me are these "mega-rich" people avoiding paying tax or not? Or are they legally tax-minimising (which everyone that claims a deduction does)? If they are avoiding could you explain how that works and why the ATO is powerless?

I'm not a fan of negative gearing either as it has fuelled the property bubble but it's going to be an interesting exercise to unwind, I believe home loan repayments should be an income tax deduction.

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Tax avoidance is illegal Marty and the ATO can very much do something about that. Tell me are these "mega-rich" people avoiding paying tax or not? Or are they legally tax-minimising (which everyone that claims a deduction does)? If they are avoiding could you explain how that works and why the ATO is powerless?I'm not a fan of negative gearing either as it has fuelled the property bubble but it's going to be an interesting exercise to unwind, I believe home loan repayments should be an income tax deduction.

http://en.wikipedia.org/wiki/Tax_avoidance

Actually legal.

And there's a bit of a difference from your average Joe claiming \$300 of donations on his \$70K salary, and someone's income somehow going from \$2.77 million to \$20K.

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Be glad they pay tax in Oz, even \$2, and live here and spend their cash of which everyone forgets they pay 10% GST like everybody else - many a rich Oz folk go live officially in Monte Carlo or Switzerland etc. to aoid paying a cent and spend a good deal of time there spending their money their also and yet still claim to be pure died in the wool Ozzies.

Sports Stars are probably the largest obvious group that does this.

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We need to reward the enterprising people who drive our economy. Many of the wealthy deserve their riches because they worked damned hard to get there- and can't see why everyone else shouldn't. Many resent having to pay taxes (even the low taxes in Australia) and justify tax avoidance schemes by claiming governments would just waste their money anyway.

What the Ginas of this world won't admit is that without the infrastructure paid for by the tax pool, they'd be nowhere. If they resent making a fair contributiion, they could move to central Africa, where there are lots of minerals, and start again. They would quickly find how expensive it is to establish and maintain viable legal, educational, training, health, transport, communication and governance systems.

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Be glad they pay tax in Oz, even \$2, and live here and spend their cash of which everyone forgets they pay 10% GST like everybody else - many a rich Oz folk go live officially in Monte Carlo or Switzerland etc. to aoid paying a cent and spend a good deal of time there spending their money their also and yet still claim to be pure died in the wool Ozzies.Sports Stars are probably the largest obvious group that does this.

Yes they pay 10% GST like everyone else, but the impact of the GST is disproportionately greater for the lower income earners than the top ones. Especially if these butchers decide to broaden the base of the GST to include fresh food and health care, which they probably will.

Someone on \$40k per annum spends, lets say, \$40k per annum on various goods and services which attract the GST. They've spent \$4k in GST which is 10% of their income.

Someone on \$1m per annum spends \$40k per annum on the same goods and services, they've spent \$4k in GST which is what - 0.04% of their income.

What the Ginas of this world won't admit is that without the infrastructure paid for by the tax pool, they'd be nowhere. If they resent making a fair contributiion, they could move to central Africa, where there are lots of minerals, and start again. They would quickly find how expensive it is to establish and maintain viable legal, educational, training, health, transport, communication and governance systems.

Ah, but that's where your conservative will say "but all these things should be privatised anyway!" - look at the Tea Party fury when Obama tried to bring in a very basic health care system in the US. The problem with total free market capitalism is that there is simply no motivation for it to look out for the most vulnerable people in society. We should have evolved past economic Darwinism by now.

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It's not a living, it's survival. Don't know whether you can live on 58% of the minimum wage Dazza, I know I can't. As for you not claiming, that's your choice. You were probably entitled to it at the time. Do you go to Medicare to get a refund when you go to the doctor? What's the difference?.

Paying Medicare is another cost to me that I don't use. I haven't been to the doctors for over 30 years so the Medicare card is a waste of money to me. I subsidise old sick people . I have had ore employment medicals

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Get your moneys worth Daz. Find a hot looking doctor then figure out what ailments you have....

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Good call Gnu. Be like that politician in the last season of Rake (top show) who claimed \$17,000 medical expenses for visits to a "chiropractor" named Pussy Patton. Probably straightened his back out, anyway.

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OK, so let's reason through that dog-whistle article a bit. Notice these mega-rich seventy are un-named and that the process by which they pay almost no tax is just mysterious, some black magic that their accountants did which the ATO is powerless against.

"70 Australians with incomes of more than \$1 million each in 2010-11 paid no income tax.The statistics released last week show that the 70 earned \$194 million among them but by the time their accountants had finished, that had been cut to less than \$20,000 in taxable income, or \$1 of taxable income for every \$9999 that went untaxed."

So their income wasn't actually "more than \$1m each" and an average of \$2.77m but less than \$20k each. So there are two possibilities here:

1) They have a large turnover but also high deductible expenses so they get to keep very little of the money they handle, so actually a low income. This happens to many businesses and sole traders, especially at the moment. The article states "Most of their tax liability was wiped out by deducting tax losses from earlier years" no crap - so they should pay tax on losses also? Does Fairfax do this?

2) The option that the hack journalist would of course like us to think is that these people are CHEATS by some mysterious un-known mechanisms that isn't available to average Australians. Somehow they can fiddle the negative gearing process or other deductibles and pay large sums to other companies like accountants which must somehow get back to their own pockets untaxed in ways the journalist is unable to explain to us. The obvious problem is that the ATO are apparently aware of what they are doing yet are not acting. In reality we know the ATO are actually pretty good at tracking this sort of stuff within Australia and watch the wealthy closely.

So, the super rich pay a gaggle of accountants so that their tax can be legally minimised. Two comments:

1. The Tax Act (which is bigger than a Sydney phone book) obviously has not covered everything. The law has left legal loopholes for people to exploit but it costs them dearly to find them. Then they make legal claims.

2. The accountants (and often lawyers) are all well-paid professionals who themselves pay quite a bit of income tax. One way or another, some tax will be paid even though some taxes are legally avoided.

Also, the richer people employ many, many thousands of others in their publishing, manufacturing, retailing and mining businesses, or whatever else they may employ people for. These tens of thousands all pay income tax and GST, etc. In turn, these taxes prop up those who are less fortunate via government wealth reallocation, e.g. the pension, unemployment benefits, people languishing in jails, etc.

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Find a hot looking doctor then figure out what ailments you have....

Stiff joints?