The conundrum of the ten beer buddies

Fiscal fairness: should tax avoidance carry no penalty?

A. The conundrum

Every day, ten friends go out for a few beers. The daily bill is €100 (on average, an outlay of €10 each).

At a certain point, the ten friends decide to have the bill paid according to a tax distribution key. This gives the following distribution:

The first four (the poorest) pay nothing.

The 5th pays €1.

The 6th pays €3.

The 7th pays €7.

The 8th pays €12.

The 9th pays €18.

The 10th pays €59.

The ten meet every day to drink their beer, and are very happy with the cost-distribution method.

Then, one day, the barman announces that he will allow the group a loyalty bonus: “Since you’re such good customers, I’ll give you a discount of €20 a day from today. So, I will only charge €80 a day.”

The group thank him and decide they’ll keep on sharing the cost — now of €80 — according to the same distribution key.

The first four still pay nothing.

The six others (the paying customers) initially want to divide the €20 into six, so that each is accorded a discount of €3.33. However, by doing that, they would in fact have to pay the fifth guy (who previously paid €1) to drink with them.

The barman makes a suggestion: why don’t they accord the discounts to the six payers according to a reducing percentage scale?

The 5th man now has nothing to pay (one more added to the ranks of the paupers).

The 6th pays €2 instead of €3 (a 33% reduction).

The 7th pays €5 instead of €7 (a 28% reduction).

The 8th pays €9 instead of €12 (a 25% reduction).

The 9th pays €14 instead of €18 (a 22% reduction).

The 10th pays €50 instead of €59 (a 16% reduction).

This, he contends, should keep everybody happy. The first four continue to drink for free, and there’s even a fifth to join them. The five others would pay less than they had done previously, so what objection could there possibly be?

The ten think it over.

“Hang on,” says no. 5. “From a discount of €20, how come I only get €1?”

No. 6 chips in, “Me, too, I also only get €1 of the €20 discount, and no. 10 gets a whole €9 of  it.”

“Good point,” says no. 7, “Why should he get €9, when I only get €2? The richest among us gets the most discount.”

No. 1 chimes in: “We four poorest get nothing at all. The whole system exploits the poor!”

The first nine round on the tenth and start tearing him to shreds.

Next day, no. 10 is conspicuously absent.

The other nine drink their pints as usual. The bill is presented, whereupon they make a very interesting discovery. They don’t have enough money to pay, not so much as half the bill.

We hear this so often about our tax system: that it’s the best-off who benefit most from a tax cut.

They are chided for their wealth and taxed at higher rates, to the point where they simply shove off somewhere else. They drink elsewhere and leave the rest to pick up their own tab.

B. A response

Oh dear. No. 10 has departed. He now drinks down the road at another bar. And, because he’s on his own, the cost of his beer is no longer €59, but €10. He must be delighted. He must ask himself why he ever agreed to pay €59 for his drinking parties. By quitting the group, he has his beer for €49 less than before. He sits and regards his beer.

He looks around at his new bar. It certainly looks the same as his old bar. A few paintings, advertisements, a barman. He is cheery, smiles a lot and asks him about the weather. It’s a subject that is soon exhausted.

After a while, no. 10 starts to wonder what the other nine are doing. He misses them. They are good company, tell cracking jokes and know lots of things he doesn’t — he learns from them and he shares with them. He attends their birthday parties and their kids’ hallowe’en and bar-mitzvah dos. He finishes his beer and leaves his lonely bar and decides to drop in at the old bar. The nine are still there.

“May I join you?” he asks them.

What should the reply be? “No”? Or “Yes, what’ll you have? It’s on us!”?

Hm.

Why did no. 10 pay so much for his beer before? Because he was forced to? Because he felt a moral obligation, because he has so much and the others so little? Or because he felt he had €49 of benefit from enjoying the company and bonhomie of his buddies?

We don’t know. Only he knows why he paid over the odds for drinking with his buddies. The question is rather, if he decides to cut his outlay by changing to another drinking venue, what else should he also cut? Less outlay is less contribution and, if his contribution is a mark of his fairness, then we can safely say that €49 is a measure of his fairness, if he pays it, and of his lack of fairness, if he refuses it. Would the buddies be justified in refusing to invite him to their birthday parties because of his ostensible lack of fairness?

There are notorious examples of this act of moving to more favourable tax locations (I suspect Monsieur Depardieu is eternally thankful that his age excludes him from the mobilisation of troops to fight Ukraine; in any case, he’s now, by all accounts, a citizen of the United Arab Emirates …). Those who indulge in the practice of fiscal relocation make a choice of where it is that, according to the complex tangle of fiscal regimes, they will make the least contribution from their great wealth to the community coffers that fuel the running of the nation state system, a system they not only pay into, but wish to pay as little as possible into, and also greatly benefit from: should their benefit therefore be reduced concomitantly? How would that be done?

Perhaps in terms of the subsidised airline industries that transport them around the world to their foreign homes and back to the country they in fact call home, to mention but one aspect of their profiteering. If qualifying for Cayman Islands residence entailed a six-month sea journey to actually get there, and six months back again, many would think twice about placing their wealth in that place. But it doesn’t. Instead they can fly there in half a day, by jet liner, thus cutting the inconvenience greatly, while benefiting from an air ticket price that reflects how anxious a national carrier is to attract those of much lesser means to take to the skies, while polluting the air they fly through.

And yet (and if I’m wrong, please inform me), those who move their wealth to other locations are welcomed home with open arms to enjoy all and every amenity that is provided by the home government for the benefit of those who remain there, pay tax there and for whom the benefit is fundamentally intended.

Subsidised airlines are a fact. And the movement of wealthy citizens to tax-favourable locations is a fact. And the lack of tangible disadvantages for them when doing so is also a fact. It is the immunity from disadvantage that might flow from avoiding taxation that renders it attractive to do. The only considerations to play with are whether it is financially beneficial to do it, and whether doing it is illegal or not. On occasion, the illegality of the device is blithely disregarded but, even if it is utterly lawful, those who engage in such devices must be made to realise that those they abandon in their financial plight cannot be expected to extend such a warm welcome as could be expected if their contribution were commensurate with their means. Above all, if their means are the product of acquisitions wrought by profiteering or market manipulation, nay, insider trading.

Why not? Because it isn’t fair. And fairness is a principle vaunted high and wide by constitutions the world over. So, why should fairness not play a role in tax rules? Tax rules, after all, are rules made under the panoply of constitution, are they not?

Anyhow, what’s fair? What’s equitable? And what is more important — realising maximum revenue by pandering to the caprices of the wealthy? Or stating a principle that holds true to the constitutional fairness enshrined in the rules that apply to all?

“Is it worth it?” comes up, as ever, against “Cost what it may.” The one, the result of evaluating whether, on balance, a proposed change brings greater benefit than something else or than doing nothing. The other may entail measures that are impractical: a pipe dream; folly. But it’ll always be a statement of principle: that we do what we do because we believe in it; its intangible benefit outstrips any material cost incurred. In the one, we weigh our principles against a T account. In the other, we set our beliefs in the vanguard and let principle rule our decision. Both laudable; both fallible. But only one puts principle in the first row.

Tax is a body of rules absent any natural law element, being, as it is, an artificial creation of man in the first place — unless we condescend in our cogitations to paying lip-service to those self-serving notions of contribution, participation and equality. So, the question is: where do we believe in our hearts that the mantra of fairness best lies in designing our tax system? Do we massage the fiscal system as coined by man to attract a maximum of contribution? Or do we adopt a principle, apply it, and say “This is fair. If those who won’t play ball don’t play ball, then so be it”?

The principles of tax: what are those; and what have they ever been?