Economics 101 For Stupid Politicians

For those who think raising taxes even if only on those making over $250k a year is a good idea, I submit that you don’t know what you’re talking about.

I owned a small franchise food service business from mid 1998 to mid 2002. Two locations, 85 employees, $1.4 mil a year in sales, (up from 700k when I bought it). I worked non-stop, about 15 hours a day. Couldn’t even get away from it on vacations.

I paid taxes out the ass from every governmental organization imaginable. There are taxes and fees associated with owning a business that a novelist couldn’t make up if he tried. I got killed on taxes when I bought it, while I owned it, and when I sold it.

In my business, nationally, the average profit margin was, and still is, 3%. Mine was 5.5%. Do the math. My income never exceeded $80k.

In my business, nationally, prices haven’t been raised to account for inflation and other increased costs in 15 years. You can’t do it. It’s a business killer. Just ask the airlines and car makers. It’s no different for small businesses.

While I personally wouldn’t have been hit by Obama’s tax plan (if I still owned the business) it’s useful to look at what would happen to a business person in the same business who it would impact. Even if you accept that Obama intends to keep his campaign promise to only raise taxes on those making more than $250,000 a year (which I don’t for a second believe) lets look at what decisions a business owner would have to make.

At a 3% profit margin an owner in my business would have had to have $8.4 million dollars in sales annually to make $250,000. If you increase his tax rate something would have to give in order to maintain that level of income. Or, second option, he can not pass on the extra costs and degrade his/her own quality of life. That’s not realistic and it isn’t fair. That owner has ALL the liability if the business fails and so he/she shouldn’t be penalized for risk taking by the tax code (more than he/she already is). So what are the options to cut costs?

1. Raise efficiency so the 3% profit margin is at the 5.5% rate I had.

Yes, this would do it. If you only looked at it simplistically. Unfortunately, business isn’t that simple. If they could just raise profit margins at the drop of a hat, trust me, they would. They work on trying to do this every day. I had those margins because I had only two stores and was able to supervise them more closely. The business owner in the same line of work making $250,000 wouldn’t have that luxury. He/she would have too many stores to supervise that closely. Business owners already try very hard to raise margins so this idea is out.

2. Take it out of the marketing budget.

Lower the marketing budget and sales go down. If sales go down fewer people are needed. That’s the same way of saying people are going to lose their job. Lower the marketing budget and the companies you place advertising with are going to have lower sales and, again, people at those companies are going to be cut and lose their jobs. If sales go down the business owner makes less money so this idea is out.

3. Raise prices.

Raise prices and you lower demand. Sales go down and fewer people are needed. Again, people are going to lose their jobs. If you don’t believe raising prices is going to lower demand I challenge you to go out and buy a Ferrari at the same price as a Honda Accord. If demand decreases the business owner makes less money so this idea is out.

4. Put off a major purchase.

This is one of the options business owners will choose. In my industry, the business owner may put off buying that new oven he/she has been looking at. So people at the oven manufacturing company lose their jobs. People who supply the manufacturing company lose their jobs. Another option is the business owner may decide to delay moving the store to a better location. People in the construction trades, and their suppliers, will have less work. Again, people lose their jobs.

5. Cut salaries or restrict salary growth.

Another likely choice, depending on the type of business, but do we really want to do anything to encourage this sort of thing?

6. Cut service.

The only way to increase profits with this method is to have fewer people doing the same work. It would result in a increase in profits but it would be temporary and eventually sales are going to suffer. Again, people lose their jobs.

7. Cut Employee Benefits.

Another likely course of action. Again, do we want public policy that encourages this?

8. Last but not least.

Cheat on their taxes. But again, this isn’t something to be encouraged.

These are just a few of the options. Any way you cut it people will lose their jobs.

There are NO good reasons to raise taxes beyond what the government needs to perform its essential functions.

If Barack Obama wants to help poor people do better in life he should focus on those things proven to help people achieve success.

A good education and a good work ethic.

Cynical Optimist