The Tax System Explained in Beer

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 4 men (the poorest) would pay nothing.

The 5th would pay $1.

The 6th would pay $3.

The 7th would pay $7.

The 8th would pay $12.

The 9th would pay $18.

And the 10th 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 $50 instead of $59 (a 15% 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 $9"

"Yes, that's right," exclaimed the fifth man. "I only saved $1 too. It's unfair that he got nine times more benefit than me"

"That's true" shouted the seventh man. "Why should he get $9 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, 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 might 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

Relationship Bust Up: Have You Protected Yourself?

Going through a relationship separation or divorce can be extremely traumatic.  I am not sure there is any way to avoid the emotional turmoil particularly if children are involved, but there certainly are steps to take to avoid overwhelming financial stress.

One common theme I have seen with many women is the lack of understanding or control over their financial position.  In particular, I find it surprising that many Mum's with businesses leave a lot of the financial and taxation side of things to their husband/partner.  Whether you are happily married or not, if you run a business, you need to be in control of every aspect, including taxation.

Statistics tell us that 1 in 3 marriages will end in divorce.  Whilst nobody really wants to think about this when getting married and let's hope its not you who will become another statistic, it is important to ensure that you are protected and well informed, regardless of what the future holds.

1. Have input into the family cashflow and understand what money is coming in and what money is going out and where and who is paying for what.  A joint account as well as separate personal accounts works well for a lot of couples.
2. Have control over your personal taxes and make sure you personally see your accountant each year (whether it be with your spouse or at a separate time) rather than leaving your spouse to handle your affairs for you.
3. Understand your individual and joint assets and liabilities; what they are worth, what needs to be paid off and what other income you receive on a regular basis.
4. Understand you superannuation and insurance as well as that of your spouse.
5. Organise and File your important documents.  For taxation purposes, as an individual, you are required to keep documentation for 5 years.  File then all of your important documents - taxation as well as general household expenses, children expenditure, bank statements, superannuation and insurance by financial year.

Having a handle on your financial and taxation affairs on an ongoing basis prior to separation/divorce will make things easier.

I recently read a checklist for women facing divorce.  One of the 10 recommendations was to Make A  Plan prior to separation .  I know what a lot of you might think, what?  How macabre!  But actually, it can be extremely empowering and calming and for those who have been through a separation or divorce, gaining some sort of inner strength is vital to be able to face what some describe as the worst experience of their lives.  The other point made, was to keep this plan confidential; don't share it with your soon to be ex-spouse, if they don't use it against you, their lawyer will.

Once you separate:

You will need to retain copies of all those documents (point 5 above).  Usually for couples, there is only 1 copy of jointly held items and  these are filed in 1 place -  so this obviously becomes problematic.  It is vital you get a copy of everything and keep them in a safe place.

If you don't have a separate bank account just for yourself, open one up as soon as possible.

Seek legal advice.  This can be costly, so seek the free advice first.

If you and your spouse have used the same accountant, this becomes a conflict of interest and the accountant will be unable to act for you both going forward.  It seems that in more cases than not, it is the woman who finds a new accountant.  This isn't necessarily a bad thing.  If you can't continue with your current accountant, I suggest you seek recommendations from your lawyer or friends who have businesses.

Consider seeking advice from a financial planner.

If you have children, contact the Child Support Agency immediately.  Child Support payments will be calculated only from the date you contact them, so the longer you leave it, the longer you are potentially out of pocket.

Contact Centrelink immediately and apply for any government benefits like the Family Tax Benefit, Child Care Benefit and Single Parenting Allowance.  Separation and divorce, even in the most amicable cases, is expenses, so every extra dollar you are entitled to counts.

Remember that you don't have to go through this experience alone.  There are many people out there who can help you - networking groups, your lawyer, your accountant.  You need to surround yourself with good people providing you with sound advice and support.

Shawn Achor: The happy secret to better work

Forecasting for the New Year

Now is a great time to reflect on how your business has performed over the last year but also to plan for where you want your business to go for the next 12 months.  Forecasting is an essential element of running a business.

So what exactly is forecasting?  Forecasting is a process used to estimate or predict the future financial performance, which of course can be a tricky process.

It is essential to use some sort of tool to help you do this.  I like to use a month by month cashflow budget format in excel and use this hand in hand with a business plan as there are some important considerations when deciding what numbers to plug into your spreadsheet.

Firstly, how did your business actually fair last year?  Where were the peaks and troughs in sales?  This is quite important to forecasting similar patterns for the coming year, particularly if specific troughs caught you off guard last year.  Once you have an understanding of your customer then this will enable you to produce a more accurate forecast.

Secondly, how does last year’s actual data compare with your business plan?  Are there things you can do differently to combat negative cashflows?  For example, introducing discount periods to stimulate sales or buying stock at different times?  Did you overspend in particular areas?  And can some item spends be tightened?

Thirdly, it is important to note that we are still not out of the woods economically.  Predictions are that the next 12 months will again see suppressed profits for many businesses due to the flow on effect of the European crisis.  Have you considered how this economic downturn may impact on your business?

For forecasting to be really successful, get into the habit of reviewing it on a regular basis during the year.  Whilst it is essential at the start of a year to help you plan financially, it should also be an ever evolving tool to really help you understand and better run your business. Revisiting the forecast each month and comparing it with actual data will help you iron out problems and hopefully minimise cashflow issues.