Putting Tax Cuts in Terms Everyone Can Understand
Some time ago I ran across the following post from Mark Gwilliam (see below), and I just had to post it here in its entirety. This might be a little tongue-in-cheek?
“Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the
arrangement, until one day, the owner threw them a curve. “Since you
are all such good customers,” he said, “I’m going to reduce the cost
of your daily beer by $20.”Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so
the first four men were unaffected. They would still drink for free.
But what about the other six men – the paying customers? How could
they divide the $20 windfall so that everyone would get his ‘fair
share?’
They realized that $20 divided by six is $3.33. But if they subtracted
that from everybody’s share, then the fifth man and the sixth man
would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man’s
bill by roughly the same [ratio] amount, and he proceeded to work out the
amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings)
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four
continued to drink for free. But once outside the restaurant, the men
began to compare their savings.
“I only got a dollar out of the $20,”declared the sixth man. He
pointed to the tenth man,” but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”
“That’s true!!” shouted the seventh man. “Why should he get $10 back
when I got only two? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get
anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine
sat down and had beers without him. But when it came time to pay the
bill, they discovered something important. They didn’t have enough
money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how
our tax system works. The people who pay the highest taxes get the
most benefit from a tax reduction. Tax them too much, attack them for
being wealthy, and they just may not show up anymore. In fact, they
might start drinking overseas where the atmosphere is somewhat
friendlier.
FOR THOSE WHO UNDERSTAND, NO EXPLANATION IS NEEDED.
FOR THOSE WHO DO NOT UNDERSTAND, NO EXPLANATION IS POSSIBLE.
An excerpt from: David R. Kamerschen, Ph.D. Professor of Economics University of Georgia”
Mark Gwilliam is the founder and Managing Director of the Business Advisory Services Group a professional services organisation that provides accounting; tax; corporate governance & risk management; business consulting and secretarial services throughout New Zealand and Australia. Mark’s blog is very informative for all small businesses, and can be found here.
Charging for Internet Use
I read a couple of disturbing articles recently about the upcoming financial control of the Internet. Here is what Rupert Murdoch said recently:
“…you can confidently presume that we are leading the way in finding a model that maximizes revenue return for our shareholders… The current days of the Internet will soon be over.”
—Rupert Murdoch
It seems that big business made a mistake some time ago by not charging for Internet service the same way they charge for cell phone service. Now they are trying to put the toothpaste back into the tube. Will they succeed?
About 360,000 people recently downloaded an iPhone app for the Wall Street Journal. Murdoch said these users would soon be made to pay “handsomely” for accessing WSJ content. And that is just a start.
Recently, Time Warner announced plans for a new billing system that “meters” Internet usage and charges customers according to how much they download. In addition to subscription rates for services (see WSJ above), customers would pay for Internet usage “plans,” and would face stiff penalties if they exceeded their limit of Internet usage.
Not only is high speed Internet access out of reach of 40 percent of American homes, it is more costly and slower in the U.S. than in 21 other developed countries. Now, with the new pricing plans, like Times Warner, high speed Internet would be even further out of reach of 10’s of millions of Americans.
Is this how America is going to reassert itself as the innovation leader of the world. The Internet is an integral part of innovation, design, invention, developing, and building—and the Internet in the U.S. is already technologically behind most of the rest of the developed world.
Where does this leave America on the new world stage of information technology and innovation?
Corporate Pay
It seems like every day we hear of some big company CEO receiving outlandish paychecks for poor performance. Here is one I just read about:
Ray Irani
CEO of Occidental Petroleum, where share value fell by 22 percent for 2008. Yet, the board of directors paid Irani a whopping $60.5 million for his “superior performance.” Of course, his performance must not have been as good as 2007, when he received $77.6 million.
For comparison, let’s look at:
William Crenshaw
CEO of Publix Super Markets, Inc., a grocer that posted a 4 percent increase in sales ($23.9 Billion) in 2008, while other grocery firms trended downward. Because of the recession, Crenshaw asked the company’s board not to increase his pay. Oh, Crenshaw’s 2008 pay?–$795,466.
It appears to me that something is wrong with this situation–no one person is worth $60, $70, $80 million in annual pay. This is especially true when their companies have performed poorly.
I guess it must be all right though, since our Treasury Secretary said the government should not be involved in compensation issues at the big “bailout” banks. Apparently, Mr. Geithner only wants to control auto industry compensation.
Am I the only one that becomes infuriated over this stuff?
Entrepreneurship–Only For the Young?
With more and more boomers joining the ranks of the unemployed—added to the growing number of retirees whose portfolios have diminished (or disappeared)—we see a large block of “older” people searching for work. Actually, many of this older group are looking to become entrepreneurs…to experience that nagging drive to start a business that they ignored when they were in a comfortable job, or had all the retirement money they thought they would ever need. But, what chance does this older group stand against the energetic, well-educated, and creative younger entrepreneur?
Well, quite good actually. Consider if you will, that Herb Kelleher was 40 when he started Southwest Airlines; Gary Burrell was 52 when he cofounded Garmin; Harlan Sanders was 65 when he started franchising KFC; and entrepreneur Mortimer Levitt’s last book was titled “96 And Too Busy to Die” (he wrote his first book “How to Start a Business Without Losing Your Shirt” when he was 75).
Not to discourage young entrepreneurs—they are the key to America’s business future—but entrepreneurship does not belong just to the young. The Ewing Marion Kauffman Foundation of Entrepreneurial Activity reports that there are twice as many business founders over 50 than there are under 25.
To be successful, an entrepreneur does not need to produce an earth shaking new product that will change the lives of mankind. Richard Branson did not invent a new product, he improved a process, and Fred Smith simply improved how packages were delivered. Just because you don’t invent a new high tech gadget does not mean you won’t be successful. You can certainly replicate businesses that are already successful (that’s what franchising is all about). Or, you can simply turn your dream into a successful business, like Fraser Doherty (SuperJam), or Justin Esch and Dave Lefkow (Bacon Salt). There are no limits to imagination.
So, there you are…anyone of any age can start a business based on whatever their dream is. Don’t be intimidated because you have never started a business—there is lots of help available…and never tell yourself you’re too old to start a business (or too young for that matter).
UAW vs. the UAW?
One of my readers asked what my take was on the ownership of Chrysler and GM stock by the United Auto Workers (UAW) union. Here is what I see today.
Restructuring of the auto industry by the government auto task force (Treasury staffers, and the Boston Consulting Group) requires the United Auto Workers (UAW) to become shareholders in both Chrysler and GM. This is because the union’s employee trust–VEBA–(this is the one that manages health care for workers and retirees) is owed about $9 billion by Chrysler, and about $20 billion by GM. Yes…that’s BILLION dollars. So, the government task force is forcing the UAW to take shares of stock for one-half of those obligations.
The UAW has taken about 55% of Chrysler’s total shares, and is expected to take about 39% of GM’s total shares. Although the union plans on selling their shares “eventually,” they are now faced with some unusual issues for a union. Here are just some of them:
- The union’s trust (VEBA) needs the money owed them in order to remain solvent. So, if the value of the shares received does not go up rather quickly, so the union can sell their shares, the trust will run out of money. Hard to say which will come first, or if Chrysler, for instance, ever does create shareholder value.
- Many people have the perception that the UAW is to blame for the downfall of the auto industry, and now owns a great deal of it. This will be a problem when the union tries to organize the workers of other industries, like casino workers in Atlantic City.
- When the UAW tries to organize another automaker (Honda?), they will be viewed as a substantial owner of competitors, and therefore will have a conflict of interest.
- When bargaining for the next contract, every dollar the union gains for the workers is a dollar of value the UAW may lose from their shares in the company. If bargaining reaches an impasse, and the union goes out on strike, thus crashing the stock value…who are they actually hurting?
There are other more subtle problems the union is going to have in this situation, but as UAW President, Ron Gettelfinger pointed out…this is still the best option available.
What do some others think about this situation?
Who’s In Charge?
I seem to recall that, in his last press conference, President Obama said the government was not going to run auto companies. I guess I must have misunderstood what was said, because here is what BusinessWeek writer David Welch said in a recent article.
“Make no mistake: The Whitehouse and the task force overseeing the restructuring of both GM and Chrysler since February are calling the shots.”
You can take a look at Welch’s complete article here, but I will point out a few interesting highlights from his article in the following.
“Treasury has a couple dozen staffers and executives from Boston Consulting Group (BCG) scrutinizing operational details at the car company. (BCG is getting paid $7 million from the government for its work on both GM and Chrysler.)”
“Some GM insiders fret that Treasury’s key players have precious little industry experience.”
The head of the Treasury Task Force is Steven Rattner, the Wall Street financier and co-founder and Managing Principal of the investment firm, Quadrangle Group. (Yes, this is the same Rattner who is being investigated for his alleged connection to a scandal involving a New York State retirement fund.) No one on the Treasury Task Force has any experience in the car industry.
Welch also reported that a dozen Treasury staffers and outside consultants recently descended on GM, and pushed them to dump Buick and GMC, in addition to Pontiac, Hummer, Saab, and Saturn. The staffers said that Toyota was successful with just two brands—Toyota and Lexus—why couldn’t GM just sell Chevrolet and Cadillac? After GM pointed out that Buick and GMC were moneymakers, and that Buick was in high demand in China…Treasury relented.
Treasury and BCG were not finished, however. The staffers and consultants made GM managers jaws drop when they questioned why GM was spending money to continue development of the Volt. Apparently, Treasury thinks the current lineup of gas-guzzling Chevrolets and Cadillacs is just fine.
Not to be outdone by staffers, one Treasury Official wanted to know when the new Chevy Malibu would go on sale. It has been in showrooms for 18 months.
I’ll bet Ford is glad they didn’t take any bailout money from the government.
Gee, I can hardly wait for these folks to take over my health care.
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