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Income tax: 'The fine you pay for being productive'

8th Aug 2019
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As far as bold marketing strategies for accountants go, labelling income tax as “the fine you pay for being useful” is one of the more intrepid manoeuvres you could implement. But that’s precisely what one Aussie accountant has done.

In the accounting world, practitioners are used to being told about the power of social media. Practices are encouraged not only to have an online presence but to inject personality into their business profiles.

But then again, most professionals are also aware of the pitfalls of social media. Personality is great, sure – but in business, it’s probably best to err on the side of caution.

Samuel Lee, who runs Atlas Chartered Accountants in Sydney, has a different idea of online propriety, however. Atlas Chartered Accountants posted a photo on Facebook of a construction worker alongside the words “Income tax: The fine you pay for the crime of being productive and useful.”

facebook ad

“We make sure all deductions legally available are deducted to minimise your tax,” Lee added. “It’s not like the government will spend it wisely.” The post drew substantial criticism, with Facebook users criticising Lee’s advert.

By all accounts, the criticism has done little to dampen Lee’s anti-taxation fervour. When contacted by the Daily Mail Australia, he said: “Why should a person who made all the right choices in life and put in 50 or 60 hours a week at the expense of his family to earn more money be punished by paying almost half his income in tax?”

Instead, Lee argued, taxes could be better used for expanding businesses and hiring more people. “The government is just trying to fund its bloated and wasteful programs.”

Taxation is theft

Lee’s post isn’t just an attempt to elicit a reaction, however. As his comment to the Mail illustrated, it’s drawn from a seriously held, personal belief about how taxation punishes success and curtails entrepreneurialism.

It’s not just a case of cutting income tax, he argued – it should be abolished. And instead, Australia’s general sales tax (GST), the Aussie VAT equivalent, should be doubled to 20% and the Australia Tax Office workforce should be slashed by 90%.

This idea, he claimed, would deflate the government’s size while offering citizens more freedom. “Then 100% of what you earn, you keep, and you pay taxes when you choose to because you choose when to spend your money through GST,” Lee told the Mail.

Without inferring too much about Lee's politics, his proposals indicate a libertarian streak. Taxation, as the old libertarian saying goes, is theft. The proponents of taxation as theft run an ideological gamut from right-wing libertarian to full-blown anarchist.

Lee isn’t arguing for the abolition of the state, it seems, but rather a radical shrinking of it. What taxation there would be is essentially voluntary as it people would pay GST or VAT when they willingly spend money in the free market.

In essence, the idea is that productive activity shouldn’t be taxed, and unproductive activities – like consumption – should be taxed.

We’re not in Kansas anymore

Lee’s pessimism towards taxation – specifically the income varietal – is not unique. Here in the UK, our own prime minister, while not in favour of abolishing income tax, of course, has been open in his plans to raise the higher income tax rate threshold from £50,000 to £80,000. Other candidates for the Tory leaders also made similar tax-cutting promises.

The central premise behind these plans is that lower taxes will stimulate growth, in essence paying for themselves by lowering the barriers to producing goods and services, the so-called ‘supply-side’ of the economy.

Economist Arthur Laffer is often held up as the intellectual doyen of supply-side economics. The Laffer curve is a simple graph that illustrates the economist’s logic. The curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100% (since a 100% tax rate would completely disincentivise working).

Laffer

Simply put, the Laffer curve argues that if tax rates are above a certain level, it actually causes tax revenues to fall since higher tax rates discourage productive activity. The logic, then, is that cutting taxes can lead to higher tax revenues, as people are incentivised to work and businesses are incentivised to hire.

It was under Laffer’s tutelage that the Kansas governor Sam Brownback initiated a particularly notable experiment in supply-side economics. In 2012, Brownback signed the Kansas Senate Bill Substitute HB 2117 into law. The bill represented one of the largest income tax cuts in the state's history.

The cut would, Brownback claimed, be a "shot of adrenaline into the heart of the Kansas economy". Kansas eliminated taxes on business income for the owners of almost 200,000 businesses and slashed individual income tax rates. By stimulating job growth and consumer spending, the logic went, the cuts would be off-set.

That’s not what happened, however. As The Atlantic put it, “What followed were nine rounds of budget cuts over four years, three credit downgrades, missed state payments, and an ongoing atmosphere of fiscal crisis.”

The Republican legislature of Kansas eventually voted to roll back the cuts, despite the governor’s disapproval. The experiment was seen as a disaster, but as far as Laffer was concerned the failure was down to Kansas not going far enough.

The logic is crazy

Ask Richard Murphy, the chartered accountant and tax campaigner, about Lee’s plans, and it doesn’t take long to get an answer. “The logic is crazy,” Murphy told AccountingWEB. “It gets wrong what the purpose of tax is. It’s not just to fund government activity: tax has a social purpose.”

The social purpose Murphy refers to is redistributing wealth. “That’s because societies that are deeply unequal are also deeply unproductive because there are fewer individuals with money to spend,” Murphy said.

As for Lee’s plans to double GST, Murphy was dubious. “The simple fact is that those who pay the lowest rate of VAT are those on the highest incomes. The ones who spend the highest proportion of VAT are those on the lowest incomes.

“The tax burden would be shifted from the well-off onto those in poverty, many of whom are in work and many of whom have children. He’s essentially arguing that the tax system should increase inequality.”

As for the idea that income tax is somehow penal and paid by the most productive members of society, again Murphy disagrees. “Those on high earnings aren’t necessarily the most productive members of society,” he added.

“The laffer curve simply doesn’t work. There’s no relationship between the profit motive and tax. In Kansas, we saw this clearly. Businesses received a tax cut but the economy flagged.

“Reducing your tax bill is a cost minimising motive. By slashing taxes, businesses don’t spend or hire, they pay themselves rewards.”

Replies (28)

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By Justin Bryant
08th Aug 2019 17:06

They are both wrong. Tax's main purpose is to give fiat currencies (i.e. currencies that wouldn't otherwise have any real value) value in the 1st place (the only other way they are given any real value is that debts are allowed by law to be settled by such currencies). It's only coz of that inherent value that the government is able to spend it on anything useful in the 1st place.

It is also a bit misleading to say tax money is "spent" by the government, since in practice the government's money that it spends day to day comes mainly from borrowing from its central bank and its tax receipts basically get automatically eliminated by net-off against that debt as soon as they are received.

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Replying to Justin Bryant:
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By quintodc
09th Aug 2019 10:34

Agreed. In fact if governments held the autonomy to do so, they could print money on their own promise, without needing to raise debt through central banks, or levy taxes, as has successfully been done in a number of countries in the past. But without central banks, debt and taxes....well you have no control over us plebs.

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Replying to quintodc:
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By NeilW
09th Aug 2019 10:42

The government does after Brexit.

Once free of Article 123 they can just use the Ways and Means Account at the Bank of England.

Since HM Treasury owns the Bank of England outright, then whatever interest rate the BoE charges HM Treasury comes right back to HM Treasury as the Bank Dividend (less expenses).

After all if you owned a bank outright you wouldn't borrow from anywhere else either. So why should your government?

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By SXGuy
09th Aug 2019 18:23

Fiat currency is given value by the interest it raises not by taxation.

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By NeilW
10th Aug 2019 13:03

It's given value by how hard it is to get it.

If I give you 10000 of my currency unit, how much is it worth?

If I tell you you had to work 4 hours to get those 10000 units you know exactly how much it is worth.

Why would you accept those units? Because you have to pay tax in them and so does everybody in your vicinity.

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By killer33
08th Aug 2019 16:22

I would have thought if a government takes too much of your income either via high rates of tax or benefit clawbacks for lower earners it is going to have a negative impact an individuals motivation to earn more.
The laffer curve, I presume, is just the macro version of all those decisions made at a micro level.

How to determine the sweet spot level of tax must be an almost impossible task as it will vary by country ( USA % is going to be lower % than Sweden's ) and I suspect will increase and decrease depending on the mood of the populace over time.

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By NH
09th Aug 2019 08:50

We only have to to look at the US to see that tax policies that cut taxes for the higher earners only results in even greater inequality and a less stable society (see 2018 UN report for example).

However there also seems to be some evidence to support the Laffer Curve (see the consequences of the 50p rate introduced by Gordon Brown), but in that case my feeling is that the fallen tax take was mainly a result of high earners choosing to reduce their income which could have been dealt with, for example by introducing the suggestion made by the OTS of taxing close company profits on the participators.

Either way, surely the most logical and fair tax system levies taxes according to an individuals capability to pay. VAT is a regressive tax.

My solution would be to scrap VAT and a number of other taxes as well as the many reliefs and allowances and collect higher taxes on earnings.

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By k743snx
09th Aug 2019 10:44

"VAT is a regressive tax".

Beloved of the EU, of course.

Perhaps with a successful Brexit, your wish may come true. Our powers-that-be will probably retain some kind of sales tax, however.
My big beef has always been with employers NI - truly a "tax on jobs".

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Replying to NH:
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By michael7
09th Aug 2019 11:34

The issue for me with the 50p rate which Brown brought in was that it was always said to be a 'temporary measure'. For OMBs who could there were a lot of bonuses/dividend paid/voted on 5 April before these changes came in.

So it is too simplistic to say 'the 50p rate didn't raise any additional revenue' - they needed 3 or 4 years of it to see the effects in my opinion - and not call it temporary

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By matthewleitch
09th Aug 2019 10:34

The article above omits the single most important reason for shifting tax from income to consumption. One of the effects of tax is to provide incentives. You want to tax the things a society should reduce and not things you want to increase. Working and being productive should be encouraged. Wasteful, excessive consumption should be discouraged. Don't worry; we will never run out of work to be done though it can take time for job allocations to catch up. In the UK many people currently live spectacularly wasteful lifestyles and consume considerably more than they need to -- more even than is good for us when it comes to food, drink, and a few other things. There are lots of improvements to our lives most of us could be making if only we weren't so busy doing things to sustain consumption we really don't need.

To do this right it is important to direct the consumption tax at frivolous, excessive consumption so that low income people are not put under too much strain. Outside the EU it may be possible to do a lot more to tweak the impact of VAT/sales tax so that it operates better than within the EU.

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By NeilW
09th Aug 2019 10:27

"Why should a person who made all the right choices in life and put in 50 or 60 hours a week at the expense of his family to earn more money be punished by paying almost half his income in tax?"

I would have thought that was fairly obvious. IF you don't pay the tax, then the income will drop by an equivalent amount as you've taken government demand out of the system.

Tax is what we pay to have that transitive demand in the economy.

And in a productive economy with machines the private sector on its own is incapable of either employing everybody, or providing public goods.

I just hope this accountant doesn't have any judges as clients. Because on his system, he would lose their business.

The analogy to use is actually the electrical system. The bit of power you pay for 'net of tax' is called Real power, but the wires you have are sized for Apparent Power, because you get taxed 50 times a second for the additional Reactive Power supplied to your house. That Reactive power is what makes your advanced technology - motors, TVs, mobile phone chargers - work.

Electrical engineers moan about it constantly as we have to supply more and more Reactive power, which means generators and wires to handle it. But without it we'd have no ability to use inductive loads.

Tax is the same. It's the price of an advanced productive economy.

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By leon0001
09th Aug 2019 10:36

“It’s not like the government will spend it wisely.”
Sounds right to me.
Anyway, don't forget that Income Tax is a temporary measure. I forget, have we defeated Boney yet?

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By ColA
09th Aug 2019 10:52

The Tudor Henrys have a lot to answer for.
Likely an apology statement from Buckingham Palace?

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By NeilW
09th Aug 2019 10:52

The laffer curve has been debunked so many times it is unreal. And yet it keeps coming back because so many people really want to believe it.

Taxation in aggregate is a geometric progression, not a simple sum. My income is your spending less tax. Your income is my spending less tax. Run that progression out and you'll find that for any amount of government spending the government will get back exactly what it spends for any positive tax rate. All that changes is the number of transactions to get there.

You can imagine this process as like a stone skipping across a ponds. The more drag on the stone (tax) the fewer hops. But the stone always sinks.

So what causes the deficit then? That is simple people not spending everything they earn, or 'saving' as it is better known. That net saving across the economy causes a balancing figure on the other side of the balance sheet which we call the 'deficit'.

It's exactly the same as the deficit a bank runs when you have any savings. How else could you be 'in credit'.

That deficit ends up, transitively, in the commercial bank reserve accounts at the Bank of England. And HM Treasury owns the Bank of England outright.

You cannot collect any more tax than the government has spent previously overall. You run out of the correct type of money if you try. In the vernacular you can't do a reserve drain until you've done a reserve add.

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Replying to NeilW:
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By leon0001
09th Aug 2019 11:01

Does that make the curve Laffer-ble?

I'll get my coat.

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Replying to NeilW:
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By Justin Bryant
09th Aug 2019 11:08

You comments illustrate how most people (including many economists) do not understand how money operates in a modern economy. Search Google for "fountain pen money" for a BoE report that explains how things actually work i.e. most money is created out of thin air effectively by commercial bank lending and tax is one of the main ways of giving such money its value in the 1st place per my above comment.

Due to that continuing money creation (and destruction when bank borrowing is repaid) process it is nonsense to talk about zero sum games of income/expenditure/tax etc.

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Replying to Justin Bryant:
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By NeilW
10th Aug 2019 13:08

You can't pay tax with bank money. You have to have central bank money to pay tax. That requires bank reserves, which a bank gets by creating its own money in response to instructions from the government to credit accounts.
Bank money is pegged to the central bank money, and operates like any other pegged currency. An instruction to pay tax from a customer destroys both the bank money and transfers the bank reserve asset to the government account at the central bank. The result is that the private bank balance sheet shrinks on both sides. The reverse is true with government spending.

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By kirstiej
09th Aug 2019 11:00

“It’s not like the government will spend it wisely”

I think the appeal of choosing to pay directly for government services might fade once Mr Lee finds out the cost of paying for rubbish collection, road repair, a Navy etc.

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By dgilmour51
09th Aug 2019 11:09

As the nature of society changes so does the perceived 'purpose' of taxation.
At one level it is fair to say that the utilisation of tax revenues to support the continuance of those who are net-non-contributors [for any reason] is, in a Darwinian sense, detrimental to bulk society.
But the argument can only be had, at all, in relatively rich societies with enough 'wealth' to enable its distribution to be considered.
In general it is a truism that states are at best careless with the contributions it recieves, on average criminally negligent, and at worst just plain theft.
My personal view is that so called 'decent' governments [most of EU countries, Oz, Canada etc.] are merely criminally negligent.

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By Kentwillumsen
09th Aug 2019 12:15

We should replace all taxes with a single tax like a sales tax.
Why do business have a "flat tax of 20%" when people have a proportional tax of "20%, 40%, 50%"?
If you provide a goods or service, it should not matter if it is provided by a business or a person.
Why does a physical business pay more tax than a virtual business, or why is a UK based business taxed higher than a foreign business?
A sales tax would apply to anything sold in the UK either in a physical or virtual store, either within or outside the UK.
Nothing should be deductible as the state should not pay for the supply chain or operating costs. That would sort out transfer pricing and other artificial intercompany costs. This would force the likes of Google or Amazon to pay same tax as a British business.
Just imagine how many civil servants we could get rid of by simplifying taxes?
Just imagine how much red tape British business would get rid of?
Sales tax should replace income tax, VAT, NI tax, business rates, corporation tax and maybe more.

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By David Gordon FCCA
09th Aug 2019 13:02

In a constructive democracy "Tax" is the money the voters have agreed is needed to fund objects which are more efficiently funded through a central pot.
In the UK this may the Armed forces, or the NHS, or Education amongst others.
The theory is;
Through our vote we mandate MPs to legislate appropriately. They in turn appoint an organisation to administer the system.
MPs legislate and supervise, HMRC administers.
Well, that is the theory.
No democratic modern state can operate except with agreed contribution from its populace, to meet agreed state costs.
In a non-democratic state tax is theft. This because the ruling elite or mafiosi take whatever they want to fund whatever they wish.
In the UK "Tax" has grown similar to plastic waste. "Because we can" say those in charge.
Notwithstanding this, there is no good economic reason
for a smorgasbord of:
Income Tax, Corporation Tax, Inheritance Tax, SDLT, IPT, VAT, National Insurance, Petrol duty, Council Tax, Capital Gains Tax. and so on.
Why should my Chip shop owner pay Income Tax, Corporation Tax, IPT, VAT, National Insurance, Petrol duty, Council Tax.?
The short answer is Human Psychology. Notwithstanding how daft the answer is, by splitting up the taxpayer's liability into several bites, Joe Public does not realise what he is paying for services rendered.

If it was all on VAT, or all on Income Tax, or whatever, there would be a revolution, as Joe Public would really know what Central Government Services were costing.

And, it keeps Civil Service employment going.

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By Dandan
09th Aug 2019 13:22

I totally agree with that Australian accountant. He is saying exactly what I have always been thinking and saying.

He also correctly states that the government is unlikely to spend it wisely. A brave man. The tax authorities will probably descend on him.

One of the hundreds of wasteful project is HS2 (£56 billion and rising) all to reduce travel time between London to Manchseter and Leeds by 15 minutes.

Colleagues are often shocked when I say tax is evil. There are better ways of getting us to contribute to society.

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Replying to Dandan:
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By BlueNose1812
09th Aug 2019 14:05

Dandan wrote:

One of the hundreds of wasteful project is HS2 (£56 billion and rising) all to reduce travel time between London to Manchseter and Leeds by 15 minutes.

And free up the existing lines to carry more local commuter and freight trains - you didn't say

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By BlueNose1812
09th Aug 2019 14:02

In a society where food and energy is unrestricted, the purpose of taxation is to delay consumption by the populace. It is just a timing issue. 100% taxation and they die of cold and starvation. 0% and they die of gluttony and alcoholism.
20% and socialists want more for the needy. 80% and capitalists want more for themselves.

Looks like the 33% of GDP we pay at present is about right. When it is collected - on income, spending or death - does not affect the P&L, only the rate of tax does that. Unfortunately governments are spendthrifts operating on a cash accounting basis, so they will naturally look to tax as early as possible (see QIP's).
Pushing the income tax take down the timeline onto VAT, SDLT or IHT only means short/medium term borrowing, to cover the lag effect, will increase.

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By tonyglasbey
09th Aug 2019 15:51

By "productive", I assume that Mr Lee refers to one's contribution to corporate growth, an aspiration shared by most participants in the capitalist system. If so, am I the only person to spot the elephant in the room? There is a clear contradiction between continuing economic growth and dwindling global resources. Both cannot coexist indefinitely.

Progressive taxation might be one tool in a managed economy to slow self-defeating growth, and maybe even reverse it before it hits the wall, with disastrous global consequences. It's good to see my clients prosper in the short term, but the backdrop of looming depletion of global resources must be a harbinger of things to come in the long term.

In my view, the global economic model must now cease to favour "growth" as a desirable aspiration, and substitute "efficiencies", and tax systems be structured accordingly. To some extent this is already underway in the UK, with generous R&D allowances and credits, but progressive taxation must be maintained to curb irresponsible ambitions at the cost of resources.

Some might see all this as "irrelevant banter", but such is explicitly allowable under the terms of this blog! ;-)

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By AndyC555
12th Aug 2019 16:25

“The laffer curve simply doesn’t work."

Showing that Murphy doesn't understand the Laffer curve or is deliberately misrepresenting it.

Remember Laffer never said cutting tax always results in more tax being paid. He said there was an optimum rate. Saying that there isn't an optimum rate is a bit like saying 'gravity' doesn't work

"There’s no relationship between the profit motive and tax."

Would anyone out there go to work tomorrow if tax rates on the day's work were 100%? So of course there is.

If tax doesn't influence behaviour, why are the likes of Lewis Hamilton currently living in Switzerland? Why are super-rich non-Doms departing the UK?

"In Kansas, we saw this clearly. Businesses received a tax cut but the economy flagged."

Without a thorough review of what happened, it's not possible to say why this happened. The briefest of reviews of what happened shows that the policy was half-hearted, with no spending cuts and no broadening of the tax base lower down and happened at a time when federal support was being withdrawn and the economy was still recovering from the crash of 2008.

That's the problem with the arguments put forward by the left in general. You can point out any number of failed high tax and spend economies and it's always something else that caused the problem. But when something like Kansas happens it's 'proof' that tax cuts are bad.

“Those on high earnings aren’t necessarily the most productive members of society,”

An easy assertion to make and one that fits the "it's not fair" mentality of the left. If someone earns more than you it must be because they've cheated, or been lucky or generally that it's not fair. That being so, lets tax the b*ggers in the name of fairness.

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By justsotax
14th Aug 2019 13:46

there is indeed an 'optimum' tax...but lets be clear its only for those with a choice....joe bloggs employee can't shift to Monaco....he is stuck with what ever the tax rate.

And lets not pretend that Monaco has picked the 'optimum' tax rate....it just happens to be the lowest rate in a place that is nice to live etc...and is just a few hours flying time away from 'home'.

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By LostinSuspense
27th Aug 2019 13:32

The problem is not paying tax but actually spending the revenue created from tax.

We have vanity projects like HS2 (in my opinion), when that money could be spent better, such as upgrading the country's telecoms network?

But this is the nature of politics and cyclical parliaments. Governments spend half their term blaming their predecessors for wasting money and creating a mess then the rest of the time on vanity projects to bribe us to vote for them at the next election.

"Oh we've not spent our budget for the year, better dig up a road somewhere and do some roadworks."

"But the gas company will dig up the same road in 5 months time to do important work, can't we wait until then and save time and money for residents?"

"Are you mad? We'll get next year's budget cut. Don't forget, people like us because we spend their money on useless things. Now pass me another funny fungi"

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