By Tera Ertz
In the administration end of a business, you have multiple categories, but we’re going to focus on two. On the one hand you have employees who handle the day to day necessities of running the business as well as setting the overall goals and direction of the company. This includes management, CEOs, HR, AR, AP and anyone not directly engaged in producing the products for the company. These employees serve vital functions in keeping the company growing, and while they can often be trimmed, the need for quality personnel again limits options for reducing costs that set pricing. The other side of this is the cost of complying with the myriad regulations and taxes imposed by governments at all levels. These regulations and taxes require the hiring of a number of personnel and the funding of billions of man hours over the whole economy that have nothing to do with the actual production of the goods we pay for when we go to the store. While there is some need in any civilized society to regulate and to tax, over the course of decades of manipulation of the tax code the cost of this burden has expanded exponentially as carve outs, loop holes, lobbying costs etc. have drowned business in a sea of red tape. This increase in cost of goods that has nothing to do with actually producing the goods has driven prices up in tandem with every new tax, guideline or threatened regulation. And the taxes themselves are also embedded in the prices, because, after all, they are part of the cost of producing those goods.
I was reading an interesting article by Art Laffer earlier this week that explains some of the problems created by our current tax structure inside our free market. He notes that economist estimate that for every dollar paid in taxes, companies pay an additional $.30 to comply with the tax laws. So, given the cost of goods scenario above, this essentially means that you, the consumer are paying $1.30 for every $1 of taxes the government collects on the products and services you buy. To give an example, if you wanted to purchase a television and it cost you $1000, the price would break down kind of like this. The profit to the company that made the TV would likely be about 10% or $100 dollars. The cost of the materials would likely run about 30%, or $300. The cost of the direct labor involved would probably be about 30% as well. The cost of company related administration, infrastructure, research, etc. would likely be about 2-3% (most companies have multiple products, so this cost per product is usually pretty low) or $20. So far, the price of the TV would be about $720. On average, embedded federal taxes make up about 22% of the cost for a whopping $220 take by the government. And then, the compliance cost adds an additional $66, which brings our total up to $1006, before state sales tax. Let’s try that in a table.
|Money Paid to Other Companies (Raw materials)||$300|
|Money Paid to Direct Labor||$300|
|Money Paid to Indirect Labor (Business Administration)||$20|
|Money Paid to Investors (Profit)||$100|
|Money Paid to Government||$220|
|Money Paid to Comply with Government||$66|
(Note the government’s take on this is more than double the company’s profit, and this does not include the additional tax of an average 20% or $64 on labor and 15% or $15 dollars on dividends that the government receives from your purchase)
Under the 9-9-9 tax plan, the compliance cost for the tax burden would be greatly reduced. The embedded taxes in products would also be reduced from their current $220 to $90. As I noted in yesterdays article, the price of goods is regulated by two basic economic principles in a free market. The first is what people are willing to pay for a product. The second is competition in the market. These two principles combine to benefits everyone, but especially the poor and those on fixed incomes when it comes to the 9-9-9 plan. Natural competition, shoppers looking for a better deal, and a desire on the company’s part to sell more products come together to reduce the price for you the consumer, in this case, even if some compliance costs still exist, your $1000 TV would likely cost about $850 before the national sales tax. And $926 once that tax was added on. In other words, in addition to depriving politicians of the ability to use your tax dollars to maintain their positions, 9-9-9 will save everyone money, including the poor.
For more of Mr. Laffer’s great insights click here.