A Large Majority of People polled want Tax Reform to make Tax Code Simpler and Fairer

Posted by PITHOCRATES - April 14th, 2014

Week in Review

People fear the IRS.  (Oh, by the way, happy tax day.)  The IRS targeting of conservative groups to silence the opposition has been chilling to say the least.  But the tax code is so convoluted that it takes an army of accountants and tax lawyers to comply.  Easy for the big corporations.  But a nightmare for small business.  For complying is costly.  And tax audits are about as enjoyable as a colonoscopy the hard way.  Without anesthetic.  Creating a great disincentive for people to become small business owners.  Which hurts us all.  For small businesses are the number one job creator in the country.

So a simpler and friendlier tax code would go a long way to create economic growth.  And an IRS less like the Gestapo or KGB would make a lot of small business owners sleep easier at night.  And encourage more people to take the plunge and start a small business.  A majority of people polled in a NAM poll agree.  And believe the time for serious tax reform is now (see New NAM Poll Says Voters Want Candidates Who Support a Simpler Tax Code posted 4/14/2014 on National Association of Manufacturers).

•Over 76 percent of voters will be more likely to favor a candidate who supports comprehensive tax reform.

•Nearly 73 percent of respondents support comprehensive reform to make the tax code simpler and fairer, even if their personal tax burden remains the same.

•An overwhelming majority, 85 percent, believe it is important that Congress and the President put aside partisanship to enact comprehensive tax reform.

We know why the Democrats don’t want to reform the tax code.  For having that power did wonders to silence the opposition during the 2012 presidential campaign.  Allowing President Obama to win reelection with 4 dead Americans in Benghazi.  And having the worst economic recovery since that following the Great Depression.  So when their only campaign strategy is to attack and intimidate the opposition because their policies have failed it comes in handy to have a political force at your disposal to put the fear of God into your opponents.  Especially when you can place that political force above the law.  Which it apparently is based on no one being punished for said targeting of conservative groups.

But the people may be tiring of the same failed Democrat policies.  It’s been over 5 years and the economy is still horrible.  Some 10 million people have left the labor force since President Obama took office.  If you add these people to those the BLS counts as unemployed the unemployment rate (at the end of February) would be 13.7%.  Not 6.7% as officially reported.  So there is a lot of dissatisfaction out there.  At least among those who want a job.  And those who do and are paying ever more taxes with nothing to show for it.  So they may vote for the candidate promising tax reform this fall.  Even if it means voting Republican.  As the oppressive IRS is now forever tied to the Democrat Party thanks to their targeting of conservative groups.



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Cash Flow

Posted by PITHOCRATES - March 24th, 2014

Economics 101

New Complex and Confusing Regulatory Policies require Additional Accounting and Legal Fees to Comply

There have been demonstrations  to raise the minimum wage.  President Obama even called for Congress to raise the federal minimum wage to $10.10 an hour.  He also wants employers to pay salaried people overtime.  There have been demands for paid family leave (paying people for not working).  Unions want to organize businesses.  To get employers to pay union wages.  Provide union health care packages.  And union pensions.  Obamacare has made costly health insurance mandatory for all employees working 30 hours or more a week.

Environmental regulations have increased energy costs for businesses.  Sexual harassment training, safety training, on-the-job training (even people leaving college have to be trained before they are useful to many employers), etc., raise costs for businesses.  New financial reporting requirements require additional accounting fees to sort through.  New complex and confusing regulatory policies require additional legal fees to sort through them and comply.

With each payroll an employer has to pay state unemployment tax.  Federal unemployment tax.  Social Security tax (half of it withheld from each employee’s paycheck and half out of their pocket).  Medicare tax.  And workers’ compensation insurance.  Then there’s health insurance.  Vehicle insurance.  Sales tax.  Use tax.  Real property tax.  Personal property tax.  Licenses.  Fees.  Dues.  Office supplies.  Utilities.  Postage.  High speed Internet.  Tech support to thwart Internet attacks.  Coffee.  Snow removal.  Landscaping.  Etc.  And, of course, the labor, material, equipment and direct expenses used to produce sales.

The Problem with Guaranteed Work Hours is that there is no such thing as Guaranteed Sales

The worst economic recovery since that following the Great Depression has created a dearth of full-time jobs.  In large part due to Obamacare.  As some employers struggling in the worst economic recovery since that following the Great Depression can’t afford to offer their full-time employees health insurance.  So they’re not hiring full-time employees.  And are pushing full-time employees to part-time.  Because they can’t afford to add anymore overhead costs.  Which is hurting a lot of people who are having their own problems trying to make ends meet in the worst economic recovery since that following the Great Depression.  Especially part-time workers.

Now there is a new push by those on the left to make employers give a 21-day notice for work schedules for part time and ‘on call’ workers.  And to guarantee them at least 20 hours a week.  Things that are just impossible to do in many small retail businesses.  As anyone who has ever worked in a small retail business can attest to.  You can schedule people to week 3 weeks in advance but what do you do when they don’t show up for work?  Which happens.  A lot.  Especially when the weather is nice.  Or on a Saturday or Sunday morning.  As some people party so much on Friday and Saturday night that they are just too hung over to go to work.  Normally you call someone else to take their shift.  Then reschedule the rest of the week.  So you don’t give too many hours to the person who filled in.  In part to keep them under 30 hours to avoid the Obamacare penalty.  But also because the other workers will get mad if that person gets more hours than they did.

The problem with guaranteed work hours is that there is no such thing as guaranteed sales.  If you schedule 5 workers 3 weeks in advance and a blizzard paralyzes the city you may not have 5 workers worth of sales.  Because people are staying home.  And if no one is coming through your doors you’re not going to want to pay 5 people to stand around and do nothing.  For with no sales where is the money going to come from to pay these workers?  Either out of the business owner’s personal bank account.  Or they will have to borrow money.  It is easy to say we should guarantee workers a minimum number of work hours.  But should a business owner have to lose money so they can?  For contrary to popular belief, business owners are not all billionaires with money to burn.  Instead, they are people losing sleep over something called cash flow.

Cash Flow is everything to a Small Business Owner because it takes Cash to pay all of their Bills

To understand cash flow imagine a large bucket full of holes.  You pour water in it and it leaks right out.  That water leaking out is expenses.  The cost of doing business (see all of those costs above).  A business owner has to keep that bucket from running out of water.  And there is only one way to do it.  By pouring new water into the bucket to replace the water leaking out.  That new water is sales revenue.  What customers pay them for their products and/or services.  For a business to remain in business they must keep water in that bucket.  For if it runs out of water they can’t pay all of their expenses.  They’ll become insolvent.  And may have no choice but to file bankruptcy.  At which point they’ll have to get a job working for someone else.

Cash flow is everything to a small business owner.  Because it takes cash to pay all of their bills.  Payroll, insurance, taxes, etc.  None of which they can NOT pay.  For if they do NOT pay these bills their employees will quit.  Their insurers will cancel their policies.  And the taxman will pay them a visit.  Which will be very, very unpleasant.  So small business owners have to make sure that at least the same amount of water is going into the bucket that is draining out of the bucket to pay their bills.  And they have to make sure more water is entering the bucket than is draining out of the bucket to pay themselves.  And to grow their business.

This is why business owners don’t want to hire full-time people now.  Because full-time people require a lot of cash (wages/salary, payroll taxes, insurances, training, etc.).  They’re nervous.  For they don’t know what next will come out of the Obama administration that will require additional cash.  For every time they want to make life better for the workers (a higher minimum wage, overtime for salaried employees, guaranteed hours, etc.) it takes more cash.  Which comes from sales.  And if sales are down future cash flow into the business will also be down.  Leaving less available for all of those holes in the bucket.  So they guard their cash closely.  And are very wary of incurring any new cash obligations.  Lest they run out of cash.  And have to file bankruptcy.  Which is why they lose sleep over cash flow.  Especially now during the worst economic recovery since that following the Great Depression.



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A Poll of Entrepreneurs shows President Obama as one of the most Anti-Middle Class Presidents Ever

Posted by PITHOCRATES - October 19th, 2013

Week in Review

This is the worst economic recovery since that following the Great Depression.  And it’s not George W. Bush’s fault.  Despite what he did to increase the size of government.  No.  The anemic recovery is due to President Obama.  And his anti-business policies (see Not open for business posted 10/12/2013 on The Economist).

America is not producing as many start-ups as it did a decade ago and those that have been created are providing fewer jobs—less than five each, compared with an historical average of about seven. Start-ups created 2.7m new jobs in the 2012 financial year compared with 4.7m in 1999.

The financial crisis clearly bears a lot of the blame for reducing America’s stock of capital and animal spirits. But it is only a partial explanation. The decline in the number of firms going public began in 2001. And these problems are continuing to delay the recovery despite the federal government pump-priming the economy and keeping interest rates near zero.

So there you have it.  Federal government pump-priming and near zero interest rates do NOT stimulate economic activity.  As these are the bedrock of Keynesian economics then Keynesian Economics does NOT work.  This is a problem for America.  Because President Obama and the liberal left are dyed-in-the-wool Keynesians.  And why are they Keynesian extremists despite the historical record of Keynesian failure?  Because Keynesian economics empowers Big Government.  That is, Keynesian economics favors those in power.  Not the people.

Three years ago John Dearie and Courtney Geduldig, who both worked for the Financial Services Forum, which represents America’s biggest financial institutions, came up with an inspired idea. Why not ask entrepreneurs themselves what is going wrong? Both big multinationals and established small firms have lots of representatives in Washington, DC. Entrepreneurs are too busy inventing their companies to spend time lobbying. The pair organised meetings and conducted lots of polls. Across a vast and diverse country they heard the same message from everyone they asked: entrepreneurship is in a parlous state. And everyone pointed to the same problems. The result is a new book, “Where the Jobs Are”, which should be dropped onto the heads of America’s squabbling politicians.

The first worry is over human capital. Entrepreneurs repeatedly complain that they cannot hire the right people because universities are failing to keep pace with a fast-changing job market. Small firms lack the resources to provide training and are consequently making do with fewer people working longer hours.

The problem with our educational system is that it teaches our young to become Democrat voters.  Not prepare them for a high-tech economy.  Our public schools teach our children about the evils and unfairness of capitalism while lauding the goodness and fairness of government.  Turning them from their parents who are selfishly destroying the planet with their global warming to the government.  Who is expanding further and further into the private sector to save the polar bears.  And when our kids get to college our system of higher education takes it up a notch.  Attacking the history and the culture that made America the greatest country in the world.  So our college graduates can tell you every bad thing America has ever done but they lack the math and science skills that our high-tech economy so desperately needs.  Forcing businesses to turn to immigrants for those skills.

Immigrants are responsible for launching about half the country’s most successful start-ups and producing a striking number of its patents. But the authorities do their best to drive them out of the country once they have been educated or to break their spirits on the visa treadmill…

The second problem is the complexity and cost of government. Entrepreneurs the world over complain about regulations and taxes. But America’s have lots to gripe about: in 2009-11 the Obama administration issued 106 new regulations each expected to have an economic impact of at least $100m a year. Besides this business founders suffer from the constant political uncertainty generated by a combination of ambitious new legislation, such as Obamacare, and ideological trench warfare. The Vanguard Group, an asset-management firm, calculates that since 2011 Washington’s bickering politicians have imposed, in effect, a $261 billion uncertainty tax that has cost up to 1m new jobs.

Any administration that raises taxes and issues 106 new regulations is no friend of small business, jobs or the middle class.  Therefore President Obama is no friend of small business, jobs or the middle class.  No matter how much he says that he is.  If you want to know why this is the worst economic recovery since that following the Great Depression it’s because of the Keynesian in the White House.  And the Keynesians in Congress.  That are waging a war on small business, jobs and the middle class.

The financial crisis has worsened the third problem: raising money. Over 70% of new businesses are launched using savings or assets—particularly houses. The crisis reduced the average net wealth of American households by about 40%. Business founders repeatedly mention other problems too. Venture capitalists are increasingly risk-averse. The Sarbanes-Oxley act imposes additional costs of $1m a year on public companies. Investors no longer bother with “growth stocks” because there is more money to be made in making lots of big trades in established firms. The dramatic decline in the number of firms going public since 2001 is worrying because, over the past four decades, more than 90% of jobs created by start-ups came into being after they went public…

Fixing the small-business problem should be at the top of the political agenda. Some 22m workers are either unemployed or underemployed, or have given up looking for work. If it continues to generate new jobs at its current anaemic rate, America will not return to pre-recession employment levels until 2020. The country is lucky that entrepreneurship is part of its DNA. It seems perverse to put unnecessary obstacles in the path of people whose ambition is to found businesses and hire new workers.

Yes, we should put fixing the small-business problem at the top of the political agenda.  Which the Republicans recently tried by defunding Obamacare.  And reining in out of control spending.  But as this would be a check on the growth of government the Democrats shut down the government before letting that happen.  For they will have their taxes, regulations and spending.  And the middle class be damned.  For theirs is a government of the ruling elite, by the ruling elite and for the ruling elite.



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How a 12-Year Old Canadian and U.S. Unions see Business Differently

Posted by PITHOCRATES - May 12th, 2013

Week in Review

Advancing technology has greatly increased productivity.  Allowing fewer workers to do what workers a generation earlier did.  Causing our workforce to age.  Fewer workers are entering the workforce than are leaving it.  And costly union contracts paying pensions and health care to those who have left the workforce has decimated union membership.  For the costs they place on business have made these businesses uncompetitive in the market place.  Chasing manufacturing jobs out of the country.  Leaving union membership in the private sector at its lowest rates since the heyday of the labor movement.  To understand why let’s take a business lesson from the Canadians.  Who are trying to encourage their kids to become entrepreneurs.  Unlike in America.  Where business and profits have become a 4-letter word (see Canadian entrepreneurs: Born or made? by BARRIE McKENNA posted 5/10/2013 on The Globe and Mail).

[Entrepreneurial Adventure] pairs students with local business people to create a business, design a product, sell it and then give the profits to charity.


Evidence suggests Canada suffers from a weak entrepreneurial culture. While it’s relatively easy to start a company, the record of turning start-ups into fast-growing and successful enterprises is less convincing.

A 2010 study by Industry Canada…

… found that Canada generates a lower proportion of fast-growing companies than other developed countries, that relatively few small companies export and that the age profile of business owners is getting older…

Many business schools, including McGill University and the University of Toronto, now offer special entrepreneurship programs.

This is a problem.  For the number one job creator in any free market economy are small business owners.  People who go into business for themselves.  Taking great risk.  And hiring people as they grow.  This is the entrepreneurial spirit.  People who start out small.  And become someone like Steve Jobs.  Most people don’t understand the entrepreneurial process.  And the importance of having a business-friendly environment to encourage entrepreneurialism.  To create jobs.  To grow a healthy economy.  Creating new products that make our lives better.  And to do that one of the first things an entrepreneur must learn is what this 12-year-old learned.

“Some things work and some don’t,” acknowledged Alim Dhanani, 12, who worked on project management and Web design for the company. “To sell something, you have to have the right price. Not too small, so you have a profit, but not too big, so people will buy it.”

A 12-year-old can understand this.  The role of prices in the economy.  They have to be high enough to pay the bills.  But low enough to encourage people to buy from you.  Often times it’s not a matter of a business owner determining the price he or she wishes to charge.  They have to figure out how to pay their bills (and earn a profit) at the prevailing market price.  Something labor unions don’t understand.  Or they simply don’t care (see Fast-food workers in Detroit walk off job, disrupt business by Steve Neavling and Lisa Baertlein posted 5/10/2013 on Reuters).

Hundreds of fast-food employees in Detroit walked off the job on Friday, temporarily shuttering a handful of outlets as part of a growing U.S. worker movement that is demanding higher wages for flipping burgers and operating fryers.

The protests in the Motor City – which is struggling to recover from the hollowing out of its auto manufacturing sector – marked an expansion in organized actions by fast-food workers from ubiquitous chains owned by McDonald’s Corp, Burger King Worldwide and KFC, Taco Bell and Pizza Hut parent Yum Brands Inc.

Fast-food workers, who already have taken to the streets in New York, Chicago and St. Louis, are seeking to roughly double their hourly pay to $15 per hour from around minimum wage, which in Michigan is $7.40 per hour…

“People can’t make a living at $7.40 a hour,” said Rev. Charles Williams II, a protest organizer. “Many of them have babies and children to raise, and they can’t get by with these kind of wages.”

Those workers face high hurdles in their fight for better pay. Low-wage, low-skill workers lack political clout and face significantly higher unemployment than college graduates…

The Detroit action was put together by the Michigan Workers Organizing Committee, an independent union of fast-food workers, that is supported by community, labor and faith-based groups such as the Interfaith Coalition of Pastors, UFCW Local 876, SEIU Healthcare Michigan and Good Jobs Now.

The unions want to do to fast-food what they did to the automotive industry.  In this case the union basically gave unskilled workers the wages and benefits of skilled workers.  Sounds great if you’re an unskilled worker.  But the UAW priced the U.S. auto manufacturers out of the market.  The Big Three are a shell of what they used to be.  With both General Motors and Chrysler requiring taxpayer bailouts to avoid bankruptcy.  And pay for their crushing pension and health care cost obligations.  For GM was paying for more people not working than they were paying to work.  Even a 12-year-old can understand that this is a business model that just won’t work.

So what will happen in fast-food restaurants if you raise the labor wage from $7.40 per hour to $15 per hour?  That’s a labor cost increase of 103%.  In the restaurant business the rule of thumb for calculating your selling prices is as follows.  You calculate your food cost then triple it.  For in general one third of a menu price goes to food.  One third goes to labor.  And one third goes to overhead (utilities, rent, insurance, etc.) and profit.  Now let’s take a typical combination meal (sandwich, fries and beverage) price of $7.50.  One third of this price is $2.48 which represents the labor portion of the price.  The increase in labor is 103%.  So we take 103% of the $2.48 ($2.54) and add it to $7.50 to get the new selling price of the combo meal.  Bringing it to $10.04.

What will customers do?  Now that the combo meal will cost $2.54 more will they just continue to eat fast-food like they once did?  Will they stop adding an extra item from the dollar menu?  Will they just buy a burger and eat it with a beverage from home?  Will they just buy from the dollar menu instead of buying combos?  Of course, with the increase in labor costs that dollar menu will have to become the $2.03 menu.  Will people stop going to fast-food as often as they once did?  Some may decide that if they’re paying for a $6 hamburger the may go to a diner or bar for a $6 hamburger.  Worried about the lost business would fast-food owners try to cut their costs elsewhere to try to continue to sell fast-food at the market price?  By hiring fewer people?  Pushing current workers to part-time so they don’t have to give them costly health insurance?  Or will they just close their restaurant.  As people just won’t pay fancy restaurant prices for fast-food.

That 12-year-old in Canada would understand how the higher labor costs would affect business.  Causing changes in buying habits.  And changes in business practices.  He would not start up a fast-food franchise if labor prices were 103% higher than they are now.  For he would have to raise prices high enough to pay the bills.  But when he did they might be too high to get people to come in and buy food.  Causing a fall in business.  And a loss in revenue.  Making it more difficult to pay the bills.  That 12-year-old would see this as bad business.  Because he understands that a business owner can’t charge whatever he wants to charge.  He has to figure out how to stay in business while selling at the prevailing market price.  And though he may love fast-food he knows that his allowance won’t be able to buy as much as it once did.  So he would reduce his purchases at fast-food restaurants.  Just as his father will probably take the family out less often because of the higher prices.  Just as single mothers struggling to pay their household bills will, too.  But the unions don’t understand this.  Or simply choose not to.  Instead they just tell the workers that their employers are greedy.

It’s a sad day when a 12-year-old has better business sense than our unions.  Then again if unions cared about business they wouldn’t have bankrupted two of the Big Three.



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FT161: “Only in government can rank amateurs be put in charge of industries.” —Old Pithy

Posted by PITHOCRATES - March 15th, 2013

Fundamental Truth

Politicians love Keynesian Economics because it’s a Pathway to European Social Democracy

For years now we’ve been hearing about President Obama’s efforts to create jobs.  Going all the way back to that laser-like focus he was putting on job creation.  And there was that $800 billion stimulus bill.  That stimulated little but Democrat campaign contributors.  The president has been talking about job creation for a long time.  Yes, he can talk the talk.  But he sure can’t walk the walk.

A big reason why the economy is still so anemic is in large part due to Obamacare.  The onerous requirements of the new health care law have frozen new hiring.  And dampened business growth.  For all those small businesses that are just starting up and trying to gain some traction see massive new costs coming their way.  On top of the massive costs they’re paying already.  From taxes.  To regulatory costs.  Increasing the cost of doing business.  And leaving less and less to reinvest into their business.  So they can grow and hire new people.  Creating jobs.  Which is something the president claims he’s all for.  Yet it is his policies that are preventing these job creators from creating jobs.  And there is a reason for that.

The president and the Democrat Party (and many in the Old Guard of the Republican Party) are Keynesians.  And they believe in the economic policies of John Maynard Keynes.  Which ushered in the era of Big Government.  And massive interventions into the private economy.  A substitution for socialism.  Providing a pathway to socialism.  As in the European variety.  Those social democracies that are all wallowing in the European sovereign debt crisis.  Because their governments grew too large.  Intervened too much into the private economy.  And spent far too much money they didn’t have.

Nixon, Ford and Carter tried Keynesian Economics on a Grand Scale once Nixon Decoupled the Dollar from Gold

All government economists are Keynesian economists.  The Keynesians tell their friends in government to keep interest rates artificially low to stimulate the economy.  Because they believe that even though consumer demand isn’t there businesses will borrow this cheap money and expand production.  And hire more people.  Also, if the economy is not performing as it should be the government needs to spend money.  With make-work programs. Paying people to do things like dig ditches.  And fill them back in.  Because they will take their earnings and spend it.  Creating economic activity.  And the government should do this with deficit spending.  Spending money they don’t have.  Either by printing it.  Or borrowing it.

They have been trying this since World War I or so.  In fact, Keynes met with FDR.  Telling him about his economic theories.  Some of which FDR took to heart.  For he did increase the size of government.  And he spent money on a lot of make-work programs.  None of which pulled the economy out of the Great Depression.  And he tried for over ten years.  Nixon, Ford and Carter tried Keynesian economics on a grand scale.  Once Nixon decoupled the dollar from gold.  Stopping the gold flow out of the country due to Nixon’s inflationary policies (foreign governments said if you want to make the U.S. dollar worthless we’ll take the gold instead at the promised exchange rate of $35/ounce).  Once they no longer had to honor that promise they were able to print even more money. Unleashing an inflation that reached double digits in the Seventies.  And caused massive unemployment and stagnant economic growth.  Stagflation.

This was a failure of Keynesian economics.  For the theory went if you have a recession you used inflation to end it.  And you did that by printing money.  But instead of an improved economy all they got was inflation (and higher prices) to go with an already bad economy.  Which just made everything worse.  Had they continued the classical economic policies that made America the number one economic power in the world (thrift, low taxes, low regulations, the gold standard, savings, etc.) there would have been no inflation.  And there would have been a lot of new economic activity.  Because this is what happened in the past with these policies.  While every time Keynesians tried to spend their way out of a recession it has never worked.  As the historical record clearly documents.

Obamacare will do to Health Care what Government has done to Businesses in our Big Metropolitan Cities

Now either those in government don’t understand this.  Or they do.  And just don’t care about the economic damage they cause as they are more interested in expanding their control over the private economy than they are about the American people.  Which means they’re either not very smart.  Or they’re devious.  Lying to the American people just to advance their agenda.  A larger and more powerful federal government.  Compounding this problem is that most of our politicians don’t understand the first thing about business.  Most are lawyers who think businesses are little more than cash piñatas.  Good for suing.  Or taxing.  But they have no idea how they work.  Which builds the case for our politicians not being very smart.  As well as being devious.

Worse, it’s these same people who are regulating the hell out of our businesses.  These people who don’t understand the first thing about running a business.  But are killing small businesses with costly regulations.  Especially in the big cities.  Where there is so much costly red tape to cut through to open a business.  And to run a business.  Especially if you want to hire employees.  A regulatory nightmare few business owners ever expected.  And so complex and costly that a lot of businesses fail because they don’t charge enough to cover all of their costs.  But these politicians don’t care.  As evidenced by the amount of business they drive out of large metropolitan cities.  Detroit once was the automotive capital of the world.  But the city government grew so large and costly that the costs of doing business in Detroit soared to pay for it.  Making it just too costly to do business in Detroit.  So businesses left.  First the jobs left.  Then the people.  The two greatest employers in Detroit these days are the City of Detroit.  And the Detroit Public Schools.  Both paid with tax dollars.  Generated by businesses.  That are no longer there.  So facing bankruptcy due to the crushing costs of government (primarily pensions and health care benefits), the governor declared an emergency.  And assigned an emergency manager to fix Detroit’s finances.

Now the people who destroyed the business environment in our big metropolitan cities are taking over health care.  Who know even less about health care than they do about running a business.  There are some doctors in Congress.  But only approximately 3.7% are doctors.  And only 16 of the 20 are Republicans.  So they will have little say with the Democrat-passed Obamacare.  While Obamacare will do to health care what government has done to businesses in our big metropolitan cities.  It will destroy it.  Because health care is very complex.  Doctors spent some 8 years of schooling to become a doctor.  And spend their career in continuing education to stay current in their fields.  But who will be managing these professionals now?  Rank amateurs.  For only in government can rank amateurs be put in charge of industries.



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The Politics of Tax Rates

Posted by PITHOCRATES - December 19th, 2012

Politics 101

Cash Starved Small Businesses cannot Afford to pay a Dime more in New Taxes

America is staring at a fiscal cliff.  Thanks to the budget debt limit debate in 2011.  The US was in danger of running out of money and defaulting on their sovereign debt.  The Republicans controlled the House of Representatives.  And the House is in charge of the money.  Before increasing the debt limit the Republicans wanted to get some spending cuts to reduce the federal deficit.  The Democrats wanted to raise tax rates (letting the Bush tax cuts expire, returning to the Clinton tax rates) to reduce the deficit.  They couldn’t reach an agreement.  So they did what politicians always do when they want to run away from a problem.  Create a committee.

The so-called super-committee.  Tasked to come up with $1.2 trillion in spending cuts (over ten years) by the end of 2012.  Or else.  With the ‘or else’ being sequestration.  Automatic budget cuts in defense and entitlement spending to the tune of $1.2 trillion.  The politicians knowing how unpleasant sequestration would be were full of confidence that the super-committee would overcome hell and high water to complete their task.  Because sequestration would be so very, very unpleasant.  Of course, politicians being politicians, kept running away from that problem.  And now we’re staring into the face of sequestration.  Taxmageddon.  The fiscal cliff.  Because the Democrats want to raise taxes on everyone earning over $200,000 (single) or $250,000 (married filing jointly).  But Republicans don’t want to because that will raise taxes on the job creators.  Something that won’t make an anemic economic recovery any better.  So let’s look at the numbers and see what kind of damage we’re looking at.

President Obama’s proposal for new tax rates leaves everything at the 28% marginal rate and below the same.  He proposes increasing the 33% rate to 36%.  And the 35% rate to 39.6%.  The new rates kick in at earnings of $250,000 (all the examples here are calculated for a married couple filing jointly).  Which raises the top income band at the 28% rate.  Holding the net tax increase to only $1,115 for a small business owner with a net income of $350,000.  Which doesn’t seem that bad.  But a small business owner with a net income of $350,000 isn’t exactly rich.  Despite paying income taxes like they are rich.  For most small business owners are S corporations or LLCs.  With their net income passing through to their personal income tax return.  So if the business owner lives on enough to equal two incomes (say $75,000 X 2 = $150,000) so his or her spouse can be a stay-at-home spouse that $1,115 comes out of $107,045 ($350,000 – $92,955 – $150,000).  Which is all they can put back into the business.  To pay for new equipment (which isn’t enough for most purchases forcing them to borrow more money and go further into debt).  To repay debt.  To cover unpaid accounts receivable.  To pay for customer write-offs for an employee error on a project.  To pay for a production run that failed to meet specifications that they couldn’t sell.  To pay for inventory shrinkage (damaged, lost and stolen goods).  To pay for employee raises.  Bonuses.  To hire new employees.  Or to pay for the newly mandated Obamacare.  When you factor in all these cost issues a small business owner may face $107,045 of retained earnings is not a lot of money and leaves a very small cash cushion.  Which is why Republicans do not want to raise taxes on small business owners.

Taxing the Rich more will do nothing to Lower the Deficit

Then presidential candidate John McCain opposed then presidential candidate Barack Obama’s proposed tax rate increases in the 2008 campaign.  Saying it would raise taxes on 23 million small business owners.  FactCheck.org debunked this number saying the actual number is closer to 6 million.  So using their number the additional tax revenue from small businesses would equal about $6.7 billion.  Approximately 0.48% of the federal deficit.  Which will do nothing to reduce the deficit.  But it will take more money away from cash-starved small businesses.  So what about millionaires?  What’s their damage?  And how much will they reduce the deficit?

The proposed tax rates will increase a millionaire’s tax by $30,549.  According to the IRS there were about 119,810 tax returns filed by people earning a million dollars in 2010.  Meaning the proposed increase in tax rates would raise another $3.7 billion in tax revenue from those earning a million dollars.  Which is only 54.7% of the new tax revenue from small business owners generated by those same new tax rates.  And only 0.26% of the federal deficit.  Which will do nothing to reduce the deficit.  So what about richer people?  Will taxing richer people do anything to reduce the deficit?  Let’s look at the numbers for someone earning $5 million.

Someone earning $5 million will pay an additional $214,549 in taxes.  Which is a huge increase.  But according to the IRS there were only 16,574 people who earned $5 million.  Which brings the total increase in tax revenue to only $3.6 billion.  Which is a $100 million less than the millionaires.  And only 0.25% of the federal deficit.  Meaning it will do nothing to reduce the deficit.  Even though they are taking an additional $214,549 away from each person earning $5 million.  That’s a lot of money from each person that results in no significant deficit reduction.  Which is the purpose of the higher proposed tax rates.

We’re simply Spending More than our Tax Revenue can ever Hope to Pay For

Crunching these numbers further we find that the proposed higher tax rates will increase tax revenue by $38.2 billion for everyone earning a million dollars and more based on 2010 IRS tax information.  Which is only 2.7% of the federal deficit.  Which is less than the automatic increases included in baseline budgeting.  Which means these proposed tax increases won’t do anything to reduce the deficit.  In fact the deficit will still grow larger.  Thanks to baseline budgeting.

The problem is that there aren’t enough rich people to tax.  The top 10% of earners are already paying 70% of all federal income taxes.  To raise new tax revenue you have to go to the middle class.  Based on the IRS there were 44,637,653 people filing income tax returns who earned between $50,000 and $200,000.  If each of these people paid an additional $1,115 like those small business owners that would raise an additional $49.8 billion in tax revenue.  Which is 3.6% of the federal deficit.  If you increased their taxes by $2,500 that would increase tax revenue by $111.6 billion.  Or 8% of the federal deficit.  Which may actually keep the deficit from growing.  But it won’t pay it down.

To get serious deficit reduction from the rich you have to take very large sums of money from them because there are so few rich people.  And even then it’s probably not possible to raise tax revenue enough to offset the automatic spending increases included in baseline budgeting.  But it’s a different story with the middle class.  Because there are so many more people in the middle class than there are rich people.  You can keep the deficit from growing by taking a far smaller amount from each of them than you would have to take from the rich.  You could even take enough to overcome the automatic spending increases of baseline budgeting to keep the deficit from growing.  But even the middle class doesn’t have enough people in it to wipe out a $1.4 trillion deficit.  Or make a dent in the federal debt.

No.  The only way to make any significant deficit reduction is with spending cuts.  Which the Democrats are steadfast against.  Because spending is their power.  It’s why people vote for them.  Which is why they will fight for increasing tax rates to the bitter end.  And never negotiate them away.  To continue the facade that new revenue can reduce the deficit.  Even though no amount of new revenue can.  Only spending cuts can.  For our spending has long since passed the Rubicon.  We’re simply spending more than our tax revenue can ever hope to pay for.  And any further increases in tax rates only reduce economic activity.  Causing the small business owners to stand fast on expanding and hiring.  Because economic growth is rewarded with punitive taxation.  So they will grow less with every increase in tax rates.  And with every increase in tax rates tax revenues will fall.  Which will lead to a downward spiral of deficits, debt, lowered credit ratings and possible default.  But anything is better to Democrats than admitting they are wrong.



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Statement of Cash Flows

Posted by PITHOCRATES - December 18th, 2012

Economics 101

No Business will be able to Repay any Loan unless their Business Operations can Generate Cash

In business cash is king.  As it is in life.  We need cash to buy food to survive.  Just as a business needs cash to pay its bills to survive.  Cash is so important to a business that there is a special financial statement to summarize cash flows in a business.  It looks something like this.

The above are made up numbers that could be similar to any statement of cash flows.  It shows the three sources of cash for a business.  Operating activities.  Investing activities.  And financing activities.  Every last dollar a business has came from one of these three sources.  And we can determine the health of the business just by seeing where its cash came from.

Not all business owners use a statement of cash flows.  Most small business owners probably don’t.  Having some other method to see where their cash is coming from.  And going to.  But if they plan on borrowing money from a bank they’re going to need one.  As bankers want to see a business’ ability to generate cash from their business operations.  For no business will be able to repay any loan unless their business operations can generate cash.

An Increase in Accounts Receivable indicates a Business’ Customers are Paying them Slower

A business generates cash from operating activities.  Which comes from sales.  Of course business have to spend a lot of money to create those sales.  So the net cash generated is basically net income with a few adjustments.  In accrual accounting we expense a portion of what we spent on an asset as a depreciation expense each accounting period.  Because although we pay for an asset in one year we may use that asset for the next 5 years.  Or more.   So we expense a portion of that asset each accounting period.  But we don’t have to write a check to pay for depreciation.  It is a non-cash transaction.  So to adjust net income to show net cash generated we have to add back this depreciation expense.

An increase in accounts payable indicates a business is paying their bills slower.  And when you pay your bills slower you free up cash for other things.  Becoming a source of cash.  With each payroll a business has to withhold taxes from their employees’ paychecks.    Social Security, Medicare, unemployment insurance, the employee’s federal and state withholding taxes.  With each payroll these liabilities accrue and are payable to the various government agencies.  You  can free up some cash by paying these taxes late.  But it is not recommended.  For the penalties for doing so can be severe.

An increase in accounts receivable indicates their customers are paying them slower.  An increase in inventory indicates they’re buying more into inventory than they’re selling from inventory.  Prepayments will conserve cash in the future by paying for things now.  But they will leave you with less cash now.  A decrease in accrued liabilities indicates they’re catching up on paying some of their accrued expenses.  Like those payroll taxes.  (In the ideal world if you add up the increase and decrease in accrued liabilities they should net out. Indicating you’re paying your accrued expenses on time.  In this example the business has a balance of $3,000 they’re paying late.)  Increases in all of these items consume cash, leaving the business with less cash for other things.

When the Owner has to put in More of their Own Cash into the Business Things are not going Well

Cash flows from investing activities can include financial investments a business buys and sells with the excess cash they have.  In this example the only investment activities is the buying and selling of some plant assets.  Perhaps selling some old equipment that is costly to maintain and replacing it with new equipment.  Even replacing a vital piece of production equipment that breaks down.  Putting a business out of business.  Thus requiring a cash purchase to replace it as quickly as possible.  Short-term borrowing may be advances on their credit line while the settlement on short-term debt may be the repaying of some of those advances.  Proceeds from long-term debt may be a new bank loan.  While payments to settle long-term debt may be repaying a previous loan.  Finally, paid-in capital is money from the business owner.  Such as cashing in a 401(k) or getting a second mortgage on their house so they can put it into their business to make up for a cash shortage.

So what does all of this mean?  Is this business doing well?  Or are they having problems?  Well, the good news is that they are meeting their cash needs.  The bad news is that it’s not because of their operating activities.  They’re meeting their cash needs by paying their vendors slower.  In fact, if they didn’t they may have had a net loss of cash for the year.  Which means had they not paid their bills late they may have gone bankrupt.  And their cash problems are evident elsewhere.   For not only are they paying their vendors slower their customers are paying them slower.  Making them wait longer to get the cash from their sales.  And with more money going into inventory than coming out of inventory it indicates that sales are down.  Leaving them with less revenue to convert into cash.  And what’s particularly troubling is that increase in accrued liabilities.  Which could mean they’re paying their payroll taxes slower.  Accessing their credit line also indicates a cash problem.  Also, having to borrow $50,000 to help repay a $100,000 loan coming due is another sign of cash problems.  Finally, when the owner has to put in more of their own cash into the business things are not going well.

These are things a business owner has to deal with.  And things a loan officer will note when reviewing the statement of cash flows.  Some people may think a net increase in cash of $18,000 is a good thing.  But it’s not that good.  Considering they had to get that cash by paying their vendors slower, paying the government slower, borrowing money as well as investing more of their personal savings into the business.  Worse, despite having all of these cash problems the government is taxing away of lot of their cash.  Because their net income passing through to their personal income tax return is $235,000.  Putting them in the top 5% of income earners.  And into the crosshairs of those looking to raise tax rates on those who can afford to pay a little more.  To make sure they pay their ‘fair’ share.



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Nikola Tesla, Sheldon Cooper, Inventors & Entrepreneurs, Compromise & Tradeoff, Theoretical & the Practical, GM and Hostess

Posted by PITHOCRATES - December 4th, 2012

History 101

Geniuses strive for Theoretical Perfection which often doesn’t work in the Market Place

There have been a lot of brilliant inventors that gave the world incredible things.  Nikola Tesla gave us the modern world thanks to his work in electromagnetic fields.  Giving us the AC power we take for granted today.  Electric motors.  The wireless radio.  Etc.  But as brilliant as Tesla was he was not brilliant in making money from his inventions.  He died broke and in debt.  And, some say, insane.  Though he was probably more like Sheldon Cooper on The Big bang Theory.  As one character on the show called him, “The skinny weirdo.”  Tesla had an eidetic memory (often called a photographic memory).  And probably suffered from obsessive-compulsive disorder (OCD).  Which when added to genius can be mistaken for crazy genius.

So Tesla and the fictional Sheldon Cooper have some things in common.  Genius.  And some odd behavioral traits.  As well as something else.  Neither was rich.  Their genius did not make them rich.  Which is a common trait of all brilliant inventors.  Their genius gets in the way of practicality.  They strive for theoretical perfection.  Which often doesn’t work in the market place.  Because perfection is costly.  And this is what separates the theoretical geniuses from practical engineers.  And entrepreneurs.

The internal combustion engine is a technological marvel.  It has changed the world.  Modernized the world.  It gave us inexpensive modes of transportation like cars, trucks, ships, trains and airplanes.  But the engine is not theoretically perfect.  It is a study of compromise and tradeoff.  Providing a final product that isn’t perfect.  But one that is economically viable.  For example, pistons need to compress an air-fuel mixture for combustion.  However, the piston can’t make such a tight seal that it can’t move up and down in the cylinder.  So the piston is smaller than the cylinder opening.  This allows it to move.  But it doesn’t contain the air-fuel mixture for compression and combustion.  So they add a piston ring.  Which contains the air-fuel mixture but restricts the movement of the piston.  So they add another piston ring that takes oil that splashes up from crank case and passes it through the ring to the cylinder wall.  The heat of combustion, though, can leave deposits from the oil on the cylinder wall.  So they add another piston ring to scrape the cylinder wall.

Selling a ‘Low Price’ is a Dangerous Game to Play Especially if you don’t Know your Costs

Every part of the internal combustion engine is a compromise and tradeoff.  Each part by itself is not the best it can be.  But the assembled whole is.  A theoretical genius may look at the assembled whole and want to add improvements to make it better.  Adding great costs to take it from 97% good to 99% good.  While that 2% improvement may result with a better product no one driving the car would notice any difference.  Other than the much higher price the car carried for that additional 2% improvement.

This is the difference between the theoretical and the practical.  Between brilliant inventor and entrepreneur.  Between successful business owner and someone with a great idea but who can’t bring it to market.  The entrepreneur sees both the little picture (the brilliant idea) and the big picture (bringing it to market).  Something that a lot of people can’t see when they go into business.  The number one and number two business that fail are restaurants and construction.  Why?  Because these are often little picture people.  They may be a great chef or a great carpenter but they often haven’t a clue about business.

They don’t understand their costs.  And because they don’t they often don’t charge enough.  A lot of new business owners often think they need to charge less to lure business away from their competition.  And sometimes that’s true.  But selling a ‘low price’ instead of quality or value is a dangerous game to play.  Especially if you don’t know your costs.  Because as you sell you incur costs.  And have bills to pay.  Bills you need to pay with your sales revenue.  Which you won’t be able to do if you’re not charging enough.

If Business Operations can’t Produce Cash a Business Owner will have to Borrow Money to Pay the Bills

The successful small business owners understand both their long-term financing needs.  And their short-term financing needs.  They incur long-term debt to establish their business.  Debt they need to service.  And pay back.  To do that they need a source of money.  This must come from profitable business operations.  Which means that their sales revenue must make their current assets greater than their current liabilities.  The sum total of cash, accounts receivables and other current assets must be greater than their accounts payable, accrued payroll, accrued taxes, current portion of long-term debt, etc.  And there is only one thing that will do that.  Having sales revenue that covers all a business’s costs.

The successful business owner knows how much to charge.  They know how much their revenue can buy.  And what it can’t buy. They make the tough decisions.  These business owners stay in business.  They see the big picture.  How all the pieces of business fit together.  And how it is imperative to keep their current assets greater than their current liabilities.  For the difference between the two gives a business its working capital.  Which must be positive if they have any hope of servicing their debt.  And repaying it.  As well as growing their business.  Whereas if their working capital is negative the future is bleak.  For they won’t be able to pay their bills.  Grow their business.  Or service their debt.  Worse, because they can’t pay their bills they incur more debt.  As they will have to borrow more money to pay their bills.  Because their business isn’t producing the necessary cash.

Those restaurants and construction companies fail because their owners didn’t know any better.  Others fail despite knowing better.  Like GM, Chrysler, Hostess, just about any airline, Bethlehem Steel, most print newspapers, etc.  Who all entered costly union contracts during good economic times.  Costs their revenues couldn’t pay for in bad economic times.  Which was most of the time.  As they struggled to pay union labor and benefits they run out of money before they could pay their other bills.  As their current liabilities exceeded their current assets.  So instead of producing working capital they ran a deficit.  Forcing them to incur more debt to finance this shortfall.  Again and again.  Until their debt grew so great that it required an interest payment they couldn’t pay.  And now they are no longer with us today.  Having had no choice but to file bankruptcy.



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Accounts Payable and Accounts Receivable

Posted by PITHOCRATES - November 26th, 2012

Economics 101

Someone’s Account Payable is Someone’s Account Receivable

Cash is king in small business.  Because without it you can’t make payroll or pay your payroll taxes.  As important as cash is, though, many business will never grow until they start offering credit.  Trade credit.  Selling things on account.  Because for those doing repeat business it is just too much of a pain to write a check for every purchase.  And it’s just dangerous carrying around that kind of cash.  So businesses offer credit to established customers.  Those with good credit.  And good reputations.

Customers open an account.  When they make a purchase they get an invoice generally payable in 30 days.  Or some number of days around that.  At the end of the month they will receive a statement from their vendor showing all of their open invoices.  Which they will compare with their accounting records.  By running their accounts payable report.  And they will compare the invoices they show outstanding with those on their vendor’s statement.   They will resolve any differences.  And then write a check for their outstanding invoices.

On the other end of the sale there is an account receivable.  For someone’s account payable is someone’s account receivable.  A sale that doesn’t bring cash into the business.  But a promise to pay cash within a short amount of time.  So a business can greatly increase sales by offering trade credit.  By being a mini-banker.  Their sales revenue will grow.  As will their net profit.  But not necessarily their cash in the bank.  For it will look good on paper.  But until they convert those accounts receivable into cash it will only be on paper.  And money on paper is just not as good as money in the bank.

When Invoices are Unpaid for 90 Days or More there’s a Good Chance they will Never be Paid

There is a certain euphoria small business owners feel when they see their sales grow.  Things are moving in the right direction.  All their hard work is paying off.  Finally.  Some even fantasize about spending some of that money.  Such as going out to lunch on Friday instead of brown-bagging it every day of the week.  Then some anxiety starts growing.  And it comes from their accounts receivables report.  When they see that 30 days after those sales come and go.  And a lot of those open invoices remain on the report.

The accounts receivable report small business owners review is called an aging report.  Because it shows what invoices are current, which are 30 days old, which are 60 days old and which are 90 days or more old.  And when invoices are unpaid for 90 days or more there’s a good chance they will never be paid.  In fact, once they pass 30 days the chances that their customers won’t pay them grow greater.  And this is the source of a small business owner’s anxiety.  When he or she sees those invoices move from 30 days to 60 days to 90 days.

Why do some customers pay slower than others?  Because they, too, have accounts receivable moving from 30 days to 60 days to 90 days.  And if they’re not collecting their money in a timely manner then can’t pay their bills in a timely manner.  When the economy slows down you will see a lot of businesses start to pay their bills slower.  And as they pay their bills slower businesses collect their money slower.  Which forces them to pay their bills slower.  Or, worse, borrow money to pay their bills until their customers pay theirs.

To encourage their Customers to Pay their Bills Timely many Businesses will offer Early Payment Discounts

Sales are great.  Everything that’s good follows from sales.  Sales are the first step in creating cash.  And cash is king.  But between cash and sales are accounts receivable.  Which can make or break any small business.  For you can’t often grow sales without extending credit.  But if you extend too much credit and/or your customers don’t pay their bills a business owner can lose everything he or she worked for.  Because when it comes down to it, sales are great but cash is king.

To encourage their customers to pay their bills timely many businesses will offer early payment discounts.  If the customer pays their invoice within 10 days, say, they will get a 2% discount on that invoice.  So if they have a $1000 invoice they only have to pay $980.  As an owner will trade $20 in profits to speed up their cash collections.  And if you look at some numbers you can see why.  If they have $150,000 in new sales in one month that 2% discount will cost them $3,000 in profits.  Now compare that to the cost of borrowing cash from an 11% credit line to replace the cash they can’t collect from their customers.  If they have receivables of $150,000 at 30 days, $300,000 at 60 days and $49,950 at 90+ days the interest cost to borrow money to replace these funds can add up to $3,322.46.

So an early payment discount can equal a business’ borrowing costs.  Making it a wash.  While offering a huge benefit.  Allowing a business to pay their bills.  Like payroll.  Payroll taxes.  And their vendors.  For in difficult economic times all businesses have cash problems.  And will do almost anything to improve their cash position.  And when it comes to paying their bills and they can’t pay them all guess which ones they’re going to pay first?  Those that help their cash position.  That is, those invoices that offer an early payment discount.  Because sales are great.  But cash is king.



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Labor Costs

Posted by PITHOCRATES - November 19th, 2012

Economics 101

Small Business Owners may have Nicer Homes but Chances are they are Mortgaged to the Hilt

A lot of people think business owners are cheapskates.  Greedy bastards.  Who hate their employees.  And try to pay them as little as possible.  Not for any business reasons.  But just because they are so greedy.  And hateful.  During bad economic times when the employer has to make some cuts labor leaders will tell the rank and file don’t believe the employer.  “Just look at the house the boss lives in.  And the house you live in.  Whose is better?  Bigger?  That’s right.  The boss’ house is.  Always remember that.”

Yes, bosses may have nicer homes.  But chances are they are mortgaged to the hilt.  Not to mention the fact that these bosses may be working an 80-hour week.  Which is not uncommon for a small business owner.  Especially during bad economic times.  As they may be negotiating with creditors, their banker, their vendors, keeping their customers happy and trying to find new customers.  While the rank and file work their 40 hours, collect their paychecks and enjoy their free time.

So it’s not easy being the boss.  That’s why so few people want to be the boss.  For it’s easier being an employee.  You work.  You get paid.  And you leave work at work.  Even if you think you’re not being paid as much as you deserve to be.  Something most employees feel.  That they’re overworked.  And underpaid.  But they never look at things through their employer’s eyes.  And see what they really cost their boss.

Most Businesses have gone from a Defined Benefit Pension Plan to a Defined Contribution 401(k)

What an employee gets paid and what an employer pays for that employee are two different things.  To begin with an employer pays for more hours of an employee’s time than he or she actually works.  When you factor in vacation time, holidays and sick days an employer may pay for 2,080 hours while the employee only works 1,896 hours.  If an employee makes $35 an hour those nonworking hours can add up to $6,440.  Which an employee gets for doing nothing.  We call them fringe benefits.  Just an employer’s way of saying, “Hey, I don’t hate you.  Here’s some money for doing nothing.”

Why do they pay this?  Because of free market capitalism.  If they don’t pay it someone else may.  And attract their good workers away from them.  Because if there is something employees will do is jump ship the moment they get a better offer.  Which is a good thing.  This is supply and demand.  And despite workers feeling overworked and underpaid this free market dynamic makes sure employees get paid as much as they can while helping employers pay as little as they can.  That equilibrium point where employees will keep working.  While leaving employers still competitive.  Though that’s getting harder and harder to do these days.  As the cost of doing business has never been higher.

In addition to these fringe benefits there are also health insurance, life insurance and retirement contributions.  With health care often being the greatest single employee cost to a small business owner.  Which is why most now make employees pay a small portion of their health care these days.  Retirement contributions have also gotten very costly.  Few people still have a defined benefit pension plan these days.  Typically an owner will offer a defined contribution 401(k) for the employee to contribute to.  And if times are good the employer may match their contribution up to a certain amount.  But employers will call this a discretionary contribution.  And it will be one of the first things to go when they are having cash flow problems in a bad economy.

The Last Thing a Business Owner needs while trying to Deal with Soaring Labor Costs are more Costs and Taxes

In addition to fringe benefits there are payroll taxes and insurances.  Such as Social Security.  Which the employer and employee split.  At least in theory.  The employer currently pays 6.2% on the first $110,100 in an employee’s earnings.  The employee kicks in 4.2% (which may go up another 2 points after the fiscal cliff, as that tax cut expires).  In reality the employee doesn’t pay any of this.  They get their check and go on their way while the employer has to find the cash to pay the 10.4% due.  For an employee earning $66,360 that Social Security tax payable comes to $7,571.  Another big check the owner has to write is for state unemployment.  Which can be anywhere around $4,000.  The following chart summarizes these and additional labor costs (note: the retirement contribution is probably between a 401(k) matching contribution and a defined benefit pension contribution).

An employee with a pay rate of $35/hour will gross $66,360.  Deductions will lower actual take-home pay.  But the employer’s total cost for this employee in this example is $108,252.  Or an additional $41,892 than the employee grosses.  Which comes out to another $17.04 an hour.  Something the employee never sees.  This is why labor is so costly.  And why employers want to hire as few people as possible.  For each additional employee they hire (in this example) they have to pay an additional 22.2% in payroll taxes/insurances.  And an additional 41% in fringe benefits.  Or a combined 63.1%.  In addition to what they’re paying the employees for their actual work.

And this is why employers want to offload health care (especially for their retirees).  And their pension liabilities.  As they can add an additional 30% (or more) to their labor costs.  What started out as fringe benefits to attract some of the best workers is now bankrupting many companies.  People are living so long into their retirement that these cost are growing faster and larger than any other cost a business has.  And it’s also why small business owners are very worried about new regulations and taxes.  For the last thing they need while trying to deal with these soaring labor costs are more costs.  Or taxes.  Which doesn’t make them cheap or greedy.  It just makes them very cautious business owners who are trying to keep their businesses afloat in an ever more difficult business environment.



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