Look Out – Here Comes the Middle Class Tax Hike

Posted by PITHOCRATES - September 25th, 2010

A Little Business Primer

Who hires more people?  Big corporations?  Or small businesses?  Some may be surprised to learn that small business provides the majority of American jobs.  Little guys taking a risk.  Doing something they love.  Are good at.  They earn a living.  And provide jobs with benefits for others.  Not too shabby.

These people start their own construction company.  Buy a restaurant (from a lunch counter to a fancy place with table cloths and a wine steward).  Captain a fishing boat.  Move up from fixing cars in a backyard to operating a three-bay service garage.  Open a multi-chair hair salon.  Run a landscaping business (and snow removal business in the winter).  Sell ice cream to tourists from an independently owned Ben & Jerry’s on the strip.  Or buy and operate a McDonalds, Pizza Hut, Dunkin’ Donuts, Kentucky Fried Chicken, Taco Bell, etc.

These are not fat cats running fortune 500 corporations.  They’re no Donald Trump.  So they keep things simple.  And yet protect themselves.  They operate as an ‘S’ corporation.  This is sort of a hybrid between the regular ‘c’ corporation and a partnership.  There’s limited liability (you limit your losses to only what you invested into your business).  And there’s no business tax on earnings like in a partnership.  All earnings are distributed to the shareholders (which could be just one person).  And taxed as personal income. 

I Will Not Raise Taxes on Anyone Earning Under $250,000

Sounds good.  Stick it to the rich fat cats.  But who else makes more than $250,000?  I’ll give you a hint.  Reread the previous section.

A small business owner operating as an ‘S’ corporation is likely to earn more than $250,000.  But they’re not fat cats.  Far from it.  Let’s pick a number.  Something you think is fair for a business owner’s salary.  Someone who probably has his or her house mortgaged to the hilt.  Works 7 days a week and puts in on average 80 hours each week.  If they could earn, say, $75,000 working for someone else, would you begrudge them earning, say, $100,000 working for themselves?  For the sake of the argument, let’s say you don’t.  That’s less than half of the $250,000 tax threshold.  The small business owner, the generator of American jobs, should be safe from any Obama tax hike, right?  Wrong.

As a business struggles to grow, a business owner plows most of their earnings back into their business.  To buy a new copier.  Replace a furnace.  Buy new software.  New computers.  A network for your computers.  Inventory tracking.  A new delivery truck.  Decals for your new delivery truck.  Building signage.  A ‘yellow pages’ ad.  New telephones.  A new website.  New invoicing software with a custom-designed invoice form.  Etc.  But before you can spend this money, you have to earn it.  And, once earned, an ‘S’ corporation small business owner pays taxes on it.  Even if they invest it back into the business.  So, the higher the tax rate, the less they can grow.  And the fewer jobs they can create.

The Obama administration keeps bitching about the greedy bankers and big corporations who are sitting on their cash.  (And they sit on their cash for good reason.  They already have excess capacity.  So there’s no reason to expand.  Because there’re no markets to expand into).  The one area, though, where there may be expansion possibilities is in small business.  Raising taxes on those earning over $250,000 per year, though, will kill small business growth.  Kill jobs.  And prolong this recession.  So why do they persist in attacking the ‘rich’?  Because in terms of voters, they’re less of them than those earning under $250,000.

Playing the Numbers

The Bush tax cuts expire at the end of this year.  If Congress doesn’t extend them, taxes will go up and the economy will tank even further.  And Obama will have violated his no tax rate increase for anyone earning less than $250,000 pledge. 

But there will be no vote before the midterm elections.  (See Congress Punts on Taxes by Martin Vaughan and John D. McKinnon at the Wall Street Journal on line.)  The Republicans want to extend them across the board.  This is a problem for Democrats.  If they do, it endorses George W. Bush’s economic policies and discredits their own.  And angers the liberal base.  They would rather extend the cuts only for the middle class.  This, however, won’t help the small business owners (i.e., the job creators).  So the Republicans are opposing this as it will not help the economy. 

Let’s look at the numbers.  Note the chart at the bottom of the Wall Street Journal article referenced above.  Especially the fine print.  It reads, “2008 tax year, an additional 25% of filers are in the 0% rate category.”  In other words, 25% of the voters pay no federal income taxes.  If you add that figure to the sum of the top three ‘Pct. of filers’ in that chart it equals 95.1%.  In other words, approximately 95.1% of voters earn $140,550 or less.  Only 4.9% of the voters earn more.  Hence the class warfare.  And after stirring up the masses (the 95.1%) to hate the rich (the 4.9%), they have no choice but to keep on hating.  I mean, they can’t tell the 95.1% that they were wrong, can they?  Especially when the poll numbers are moving against them.

So, of course, the Obama administration sticks to the time-honored playbook.  And attacks the rich.  In hopes of persuading enough of the 95.1% to forget about results and to just vote their hate.  We call it playing the numbers.  There’s only one problem.  Most of the 95.1% work for the 4.9%.  So if you make it too costly for the 4.9% to expand and create jobs, they won’t.  They may even cut back.  And the 95.1% are the ones who will suffer.  They may see a reduction in their benefits.  Work longer hours (because their boss can’t afford to hire a new employee). They may even lose their job.  And their house.  They may not like that.  But at least they can find solace in their hate.

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FUNDAMENTAL TRUTH #20: “It is never a consumer that complains about ‘predatory’ pricing.” -Old Pithy

Posted by PITHOCRATES - June 29th, 2010

LOW PRICES.  GOD help me, I do hate them so.  I hate them with every fiber of my body.

Who says this?  Do you?  I don’t.  Of all the times I’ve spent shopping, I have never heard anyone bitch about low prices.  I’ve heard people bitch about high prices.  But never about low prices.  When gas approached $3/gallon, people bitched about that being too high and drove 10 miles to find ‘cheap’ gas to save a few pennies per gallon.  Let it approach $4/gallon and they’ll want Congress to take action.  To attack Big Oil.  To seize their oil and their profits and give us cheap gasoline in return.  But when gas was cheap, no one ever bitched about it being ‘too’ cheap.  It just doesn’t happen that way.  People bitch about high prices.  Not low prices.

So who bitches about low prices?  Competitors.  There’s a saying that competition makes everything better.  And it does.  It lowers prices.  And raises quality.  And who is looking for lower prices and higher quality?  Consumers.  Who isn’t?  Competitors.  Especially competitors with political connections.

WHEN THE BIG 3 were putting out crap in the 1970s, they did so because they could.  I mean, who else were you going to buy a car from?  So what if your car breaks down and the fenders and quarter panels rust away?  That just means you gotta buy another car sooner rather than later.  A pretty sweet deal.  Especially when there are only three places to go to buy a car.  And each of the Big 3 is selling the same crap.

Then the Japanese had to go and ruin a good thing.  They started selling cars in America.  These cars were smaller than your typical American car.  But there were other differences.  They didn’t rust like the American cars.  They didn’t break down as much.  And the imports were cheaper than the American cars.  Lower price and higher quality.  More bang for the buck.  Exactly what consumers were demanding.

So what was the response of the Big 3?  Did they rise to the level of their new competitors and deliver what the consumer wanted?  No.  They ran to government for help.  For protection.  And they got it.  Voluntary Export Restraints (VER).  The government negotiated with the Japanese to ‘voluntarily’ limit the number of cars they exported to the United States.  Or else.  So they did.  To avoid worse protectionist policies.  Problem solved.  Competition was limited.  And the Big 3 were very profitable in the short run.  Everyone lived happily ever after.  Until the Japanese refused to play nice.

The problem was what the Big 3 did with those profits.  Or, rather, what they didn’t do with them.  They didn’t reinvest them to raise themselves up to the level of the Japanese.  Protected, they saw no incentive to change.  Not when you have Big Government on your side.  And how did that work for them?  Not good. 

So look, the Japanese said, the Americans like our cars.  If the American manufacturers won’t give them what they want, we will.  While honoring the VER.  We won’t export more cars.  We’ll just build bigger and better cars to export.  And they did.  The Big 3 were no longer up against inexpensive, higher quality subcompacts on the fringe of their market share.  Now their mid-size and large-size cars had competition.  And this wasn’t on the fringe of their market share.  This was their bread and butter.  What to do?  Build better cars and give Americans more bang for their buck?  Or run to government again?  What do you think?

The Big 3 assaulted the Japanese under the guise of ‘fair trade’.  The cry went out that unless the Japanese opened up their markets to American imports (in particular auto parts), we should restrict Japanese imports.  To protect American jobs.  To protect the American worker.  To protect the children.  This was code for please make the Japanese cars more unattractive to purchasers so they will settle for the more costly and lower quality cars we’re making.  (Let’s not forget the reason Americans were buying the Japanese cars in the first place).

The Japanese response?  They took it up a notch.  They entered the luxury markets.  They launched Acura, Lexus and Infiniti.  They competed against Cadillac and Lincoln.  And well.  The quality was so good they even affected the European luxury imports.  More attacks followed.  Americans were losing their jobs.  Soon there would be no more American manufacturing left in the country.  So the Japanese built plants in America.  And Americans were now building the Japanese cars.  The Japanese actually created American jobs.

SON OF A BITCH!  So much for the loss of American jobs.  The Japanese threw a wrench in that argument.  So now the argument became about the loss of ‘high paying’ American jobs.  For the Japanese plants were non-union.  Didn’t matter that their workers were making better pay and benefits than many in their region.  No.  What mattered was that they were building a better product.  And they didn’t want THESE jobs in America.  But if they couldn’t get rid of these new workers, they should at least unionize them so their cars cost more.  To make them a little less appealing to the American consumer.  So far they have been unsuccessful in this endeavor.  The workers are happy as they are.

Well, these cars just weren’t going away.  So the Americans surrendered car manufacturing to the Japanese.  They couldn’t beat them.  (Of course, it’s hard to do that when you don’t even try).  They, instead, focused on the higher profit truck and SUV markets.  Then the Japanese entered those markets.  And at every level they competed with the Americans, the Japanese gave more bang for the buck.  And the consumers responded.  With their hard-earned wages.  It just wasn’t fair.  The Japanese kept giving the American consumer a better product.  No matter what political action the Big 3 took or demanded.

And there’s the problem.  They sought their answers from government.  Instead of making a better car.  They wanted to stop the Japanese from giving the American consumer what they wanted so they could force Americans to pay more for less.  All the while the economy was forcing the majority of consumers to get by on less (the majority of consumers do not have the wage and benefit package the ‘select’ few had in the Big 3). 

Fast forward to 2008 and we see the ultimate consequence of their actions.  Bankruptcy.  GM and Chrysler had to grovel for a federal bailout and in the process become Washington’s bitch.  Ford survived on her own.  As did the Japanese.  You can bitch all you want about costs, but if you have the revenue you can pay your costs.  And the Americans just couldn’t sell enough cars to maintain the revenue they needed for their cost structure.  By refusing to address the core problem (they weren’t making cars Americans wanted to buy), they only made their competition stronger and more entrenched in the U.S. market.

IT’S ALL POLITICS.  Political cronyism.  And crony capitalism.  It all comes down to political spoils and patronage.  That’s what happens when politics enter capitalism.  Big Business partners with Big Government and they enter into relationships.  You scratch my back and I’ll scratch your back.  But when government protects a business for political expediency, the industry suffers in the long run.  As the U.S. automobile industry has.  Ditto for the U.S. textile industry.  And the U.S. steel industry.

So what goes wrong?  When you protect an industry you insulate it from market forces.  You can build crap.  The problem is, consumers don’t buy crap.  So, for awhile, politics intervene and makes the crap more favorable.  Whether it’s predatory pricing, monopolistic pricing or collusion, business can’t win.  Big Government is there.  If your prices are too low, government will intervene.  If prices are too high, government will intervene.  If prices are too similar, government will intervene.  To make things ‘fair’.  And by fair they mean to reward those who play the game and to punish those who don’t.  And the spoils go to those large voting blocs they need.  And in return for their votes, they can count on patronage.  Government jobs.  Political positions.  Favorable legislation and regulation.  If you got the vote out, you were rewarded quite nicely. 

And consumers be damned. .

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