LESSONS LEARNED # 50: “What do the great entrepreneurs have in common with politicians? Not a whole hell of a lot.” -Old Pithy

Posted by PITHOCRATES - January 27th, 2011

Cigarettes may be Bad for You, but they’re Good for Government

Government services cost money.  A lot of money.  And there are only a few ways government can get money.  They can tax their citizens.  Borrow money.  Or print money (if they’re the federal government).  When the government provides only the bare essentials for its populace, they can usually pay for those services with the taxes they collect.  This is the best way to pay for things.  It has the least adverse affect on our money.  And our credit rating.  But you have to be careful not to dampen economic activity.  Because taxes are a function of that activity.  And that activity can be a function of taxes.  There is a general inverse relationship between the two.  High taxes often gets you low economic activity.  Low taxes tend to give you high activity.  Other things being equal, of course.

But government spending tends to grow.  For various reasons.  And sometimes when it does, the spending is greater than the amount collected in taxes.  Especially during recessionary times.  So, to cover the deficit between revenue and spending they borrow money.  Or print it.  Lots of governments do this.  You can see record debt levels and record deficit spending throughout the world.  Greece was in the news recently.  Argentina suffered some bad times a few decades ago.  And now the United States is reeling a bit from their crushing deficits and debt.  And there are more.  Few nations are immune from this problem.

As this progresses, governments begin looking for additional tax revenue.  Such as sin taxes.  Cigarettes may be bad for your health.  But they’re still legal.  Why?  Taxes.  Few things do we tax so heavily.  And they’re one of the few things that we can heavily tax.  Because they’re addictive.  Cigarettes are a windfall for the government coffers.  But it doesn’t stop with taxes.  The government even sued Big  Tobacco.  To help pay for the medical costs the government incurs treating people (via Medicare and Medicaid) with smoking related diseases.

Which came First?  The Politician or the Entrepreneur?

Cigarettes may be bad for you.  But this country owes a lot to tobacco.  Back before it was bad for us (well, at least before we knew it was bad for us.  Then again, it wasn’t really all that bad for us back then.  For few were living long enough for it to become a health problem.  But I digress) it was a pretty big cash crop.  Even used for money because it was so valuable.  So an industry grew.  And that industry became a very lucrative one.  With deep pockets.  Producing an addictive product.  A veritable gold mine for a high-spending government.

Now, the government didn’t do a thing to make a single cigarette.  But it profited handsomely off of cigarettes.  It’s sort of like that chicken and egg riddle.  Which came first?  Well, speaking about business and government, it’s not much of a riddle.  Business came first.  For without business, there would be no government.  Because someone has to create wealth first before they could tax it away.  Or sue it away.

You see, that’s the difference between entrepreneurs and politicians.  Government needs entrepreneurs.  But entrepreneurs don’t need government.  Because entrepreneurs create things.  While government takes from people that create things.

Dirty, Sexy Energy is Destroying the Planet

Entrepreneurs have invented some pretty impressive things.  James Watt gave us a pretty efficient steam engine.  Henry Ford gave us a pretty affordable car.  Watt helped to launch the Industrial Revolution.  Ford just took it to new heights.  With his mass production.

The steam engine was the big first motor of the world.  It pulled us forward.  In steam locomotives.  And coal-fired power plants.  It was a giant leap forward for mankind.  Then came the internal combustion engine.  More compact.  And more powerful.  The first diesel-electric locomotive outclassed the state of the art steam locomotive in every way.  This little power plant was smaller.  More powerful.  And cleaner.  (Steam locomotives belched huge plumes of smoke and ash wherever they went.)

It may have been cleaner.  But it was still dirty.  For both the steam engine and the internal combustion engine produced carbon dioxide.  And the environmentalists were saying that this carbon dioxide was warming the world.  They called it global warming.  And it was bad.  Mostly theory.  But the theory pointed to nothing less than apocalypse.  Someone had to do something.  To save the planet.  And, guess what?  Someone was ready.  And willing.

Just give me something to Tax, Entrepreneur

A high-spending government just embraced these environmentalists with wet, slobbering kisses.  Because they knew what to do.  Not about cleaner energy sources.  But about taxing the dirty ones.  And they needed more taxes.  For their high spending.  So the environmentalists and government were rather simpatico.  To say the least.

Their idea?  Carbon taxes.  And carbon trading (i.e., Cap and Trade).  Let’s face it, modern civilization is addicted to energy.  We can’t do without it.  So we’ll never stop using it.  Sort of like cigarettes.  So they would tax carbon.  Or make polluters buy permits to pollute.  Either way they make big money.  All in the name of saving the planet.

Sure, it all sounds nice.  In a touchy feely way.  But taxing energy will kill economic activity.  With the cost of doing business going up, there will be less business.  The carbon taxes/polluting permits may not even offset the loss of tax revenue resulting from this decline in economic activity.  But when times are desperate, they often will try desperate measures.  And when you have deficits and debt at record levels, these are desperate times.  So they’ll try to push carbon taxes.  And pollution permits.  Not to save the planet.  But for the revenue.  And they will thank God for the entrepreneur who was able to make something that people wanted.  That they couldn’t do without.  Because without the entrepreneur, there would be nothing to tax.

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