Money Saving Wednesday…Economics 101
Since schools, in large part, no longer teach economics I thought I would give you a quick overview today. You can not make wise economic choices without a basic understanding of how things function.
Taxes and fees are basically the same thing. It seems over the last few year politicians have been voting to add more and more fees to every aspect of our lives. These are nothing more that taxes with a fancy name. Car registration fees, if you want to drive, you have to pay them. If there is no choice, it is a tax. The definition of the word tax: a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc.
So when you hear about a new proposed fee realize it is a tax. It may not affect you now, but you do not know what your future holds and that fee on small business may be a fee on you by next year, should you decide to start a small business.
Most small businesses and all farmers and ranchers borrow money during the off season times in their business cycle. In other words, there is little money for a farmer until the peaches are picked and sold, however, there are expenses, spraying, pruning, watering, year round. So when the cash is gone after selling the crop and before the new one is picked the farmer needs to borrow money. When banks are afraid the money may not be paid back by a few, they stop extending credit to all. Thus small businesses are forced to lay off workers and to downsize their operations. You pay more because there is less product available and people loss jobs turning to government assistance and welfare roles swell.
Raising taxes on those making over $250,000. How does that affect you? Many small businesses “make” over $250,000 a year. At least on paper. Money comes into a business and then is distributed among it’s workers and suppliers in the form of salaries and business purchases. Think of it as you would your household budget. If you get a bonus or a raise you spend it. Yes, you do. Think about it. Even though you are in the same home you were in before your last raise don’t you still find it hard to make ends meet? Yes, because of inflation but also because as we make more we spend more. A bad…habit we need to learn to break, but that’s another post.
What happens when you loose a job, have an emergency, or the size of your family increases? You tighten your belt. You eliminate eating lunch out and brown bag it. You pull the kids out of piano lessons. You vacation at home.
The same is true of any and all businesses. When there is a tax increase there are only two choices. You either reduce the size of your workforce, freeze wages, move to a smaller facility, or in some cases call it quits. Now, your workers have less money to spend, the owner of the facility you left needs to find a new tenant, there is less competition in the marketplace so the product the business used to make now becomes more expensive. The other option for business when there is a tax increase is to pass along the cost to the rest of us.
When a business is allowed to keep more of their revenue they do exactly what we do at home. They spend more money. They hire more workers, build new facilities, expand their product line and grow so they can make more money. In other words more jobs are created, contractors and architects are hired to build the new facility, the furniture company gets orders for office furniture, the equipment company gets orders for new equipment to make the product, an advertising agency is hired to promote the product.
We hear about huge profits at some of these companies, but be careful. Many of those companies pay those profits to share holders. If you have an IRA, 401K or a pension plan, that’s you. Many use the profits in research developing new medicines, energy resources and food sources. When you hear a company is making big profits do a little research to understand exactly what that means for the particular company.
We have heard much about CEOs and other executives making huge salaries. That is disgusting. Where are all the unions who claim to be looking out for us. They are invested in those companies and should be questioning those huge salaries. Do we really want the government to come in and control salaries. That is called communism. If you are invested in a company their records are open for inspection and you should ask questions. You may be only one small voice but with the internet now, your voice can grow quickly with a few clicks of the mouse.
I’m really not trying to make a political statement here, although I know it really looks that way. I do want you to understand and think about the way the system works, at least have a basic understanding. You can not make good choices for your family if you don’t understand the basics.
Consider food (you knew I’d get to that eventually). As the cost of fuel has risen world wide so has the consumption. We are competing to purchase oil with people who have never had the opportunity to own a car before, China and India are great examples. Less available, the price goes up. Now, farmers pay more to run their tractors, food manufacturers pay more to transport the food from the farm, they pay more to run the equipment to package the product and they pay more getting the product to the grocery stores. The grocery stores are paying more for the product and also paying more for the energy they use to keep their doors open. Now we pay more. Now add to that the natural disasters around the world. Rice crops have been destroyed in Asia; crops have died or been tilled under in Australia due to drought; floods, tornadoes and hurricanes in the US have destroyed crops and in some cases kept them from being planted at all. In this case taxes weren’t raised on the food companies but expenses were, same result, we are getting less or paying more.
As you consider how to save money and how to invest your money. Watch for the signs around you. Food prices are not going to come down. When we purchase so much of our energy from other nations we are stuck, and that is not going to change soon. Bad weather has reduced food supplies. That will not change until another growing season ends, and then only if there are no more huge weather disasters. Third world countries are consuming more food as their incomes have risen. That will never change except that their needs will increase, thus consuming more of the available food supply.
This is not meant to frighten you, only to help you understand now is the time to take control of your family’s resources and spend them wisely. We are not panicking, we are preparing.
I’ll be the first to admit I don’t know much about economics and have no idea which of the major parties tax plans would be better. But I also assumed that the $250,000 is the taxable income, not gross right? So if a business makes a profit after paying for their building, payroll (and I would assume the 401k/retirement contributions… those have to be tax deductible right?), etc… then if they make out with $250,000 on top of that, then they would be taxed more under McCain’s plan.
If that’s the case, I’m not sure I buy the R&D angle either. R&D would come out of the gross profits as well. A company could spend all the money they wanted on developing a new medication or technology and write it off on their taxes.
I figure I’ve got to be missing something big here because I just don’t follow your line of thought. I mean, I do somewhat, but I also just don’t see how some of your points are correct. I guess I’m hoping you can clarify that, thanks!
I have said I am no economist so I can only speak from personal experience. Our family has owned several small businesses over the past 30 years. We have had no employees to many. What I have learned:
In the case of a business making $250,000 the government will be taking 39% of that taxable income, or $99,000. (If present tax laws are allowed to expire) That seems ridiculous to me. Out of the money that is left business owners must replace or repair old equipment and purchase new inventory to continue operating. A raise for employees has to come out of this profit. If you own a business where you reimburse employees for mileage that needs to come out of those funds as the year progresses because employees don’t want to wait until the end of the year to receive those, so while you may be able to deduct them at the end of the year you have to have the cash to pay them as you go. Any business fees, rent and mortgage payments, licensing fees, etc. all have to come out of these profits to continue operating the year following when you made those profits. So they really aren’t profits at all if you need to use them to keep your business running the following year. If you do not have enough cash from the previous year to continue operating you have to borrow money. If you have to borrow money you will be paying interest on that money and guess what..that leaves business no options except to raise prices. We lose.
As far as research and development are concerned the same principle applies. Yes, you can deduct that at the end of the year but where do you get the money for that research to begin with? From last year’s profits.
Think of it as you would your family budget. The money you make after taxes is your profit. What will you do when that is reduced? You use your profits every week to keep paying your bills and caring for your family’s needs. That is exactly what a business does.