Friday, August 22, 2008

Where Did American Business Go?

Once you realize that business does not pay taxes, you begin to see how Congressional thinking can be flawed, the cost is added to the price of the item. The employer doesn’t pay one dime into Social Security or health care, the worker does. The employee's wage is just a number that the employer adds to his cost of doing business. The entrepreneur in this country is motivated by profit.

Employee productivity can increase profits. But notice if government wants a bigger share (taxes), there is an easier way to increase profits. Move off shore. Right now wages in China are from 25¢ to 60¢ per hour. A manufacturer making a product for sale in the United States can avoid a lot of tax by not producing it stateside. Ever wonder what sort of employee retirement plan China has to offer?

The American consumer loves the cheap prices. The question comes up, “Do we really make anything in this country?” Notice that outsourcing gets rid of the high labor costs. Plus you are no longer a manufacturer; you are an importer/wholesaler. Life has suddenly become simpler; you can fire the book keepers.

Think it out. Manufacturers set up shop in a foreign country. They pay less in taxes. Cutting American labor means their Social Security contributions are less. Of course, if you are unemployed because of this, you don’t pay any taxes either. That in turn entitles you to unemployment insurance for 36 weeks and food stamps (the ski slopes in Colorado will be packed this winter). Do you get the feeling that this mess is building up momentum while traveling down hill???

All Congress did was raise corporate taxes, raise the minimum wage, and raise employer social security contribution amounts. By God, Congress is going to look out for Joe Six Pack. I know they meant well. Let’s face it; the only topic Congress can handle at an expert level has more to do with reproduction than anything dealing with basic economics.

What is the net result of Congress’s actions? We don’t produce much of anything anymore. The industry we have left either sells hamburgers or Starbuck coffee. The tax base instead of increasing has gone down. So what will Congress do for an encore? I would hope nothing, but by god they’re hell bent to fix this up. It’s a little like sharpening the blade on your lawn mower while its running. You can trim your nails at the same time.


Anonymous said...

Actually, Americans did this to themselves. We established a way of life that was extremely expensive to maintain. While our standard of living wasn't that out of whack, our cost of doing so was. We lost our work ethic, demanded lifetime benefit packages way beyond reasonable and, generally, wanted to live/act like royalty. I have worked in many offices where half the staff were "looking busy" at any given time. As in any good capitalistic system, somebody comes along to produce it more efficiently. In a global system, American companies had not choice but to move overseas
to compete. Yes, Congress played a role but lets get real. The American way of life is "somebody else is at fault and did it to poor me". Rather than face the consequences of our behavior, we simply moved into a system of "charge it". It's called "avoidance of consequences"
But like any other out of control behavioral pattern, reality always arrives. The first stage of reality arrival is "it's not my fault". The next stage is taking a good, long, hard look at ourselves and accepting responsibility. Only then can we begin to solve the problem.

Jim in San Marcos said...

Hi Anon 8:35

I agree with you, I was sarcastically pointing out that the laws passed by Congress for the good of the common man had the opposite effect. Plus as you suggested, foreign competition is killing us. Just yesterday the GM and Ford asked for a 25 billion dollar government loan guarantee.

I've got two degrees and probably make half of what one GM laborer makes, go figure.

It is definitely not a clear cut black and white issue, thank you for your comments

Malcolm said...

Actually, the employer DOES have to pay taxes into social security.

Currently, they pay (I think), 6.2% for social security, and another 1.45% for medicare

If you are self-employed, like I am, this also means that you're technically paying twice: once as the employer and once as the employee.

Anonymous said...

My sister lives and works in a small town in Kentucky. I recently visited her and she took me on a tour of where she works. Her company (solely US owned and operated) manufactures office furniture and employees a little over 100 employees. As I toured the plant I noticed the employees were around 25-50 years old, all Caucasian American... and no Hispanics anywhere to be found. Talking to the plant manager he would hire them but can’t seem to find them. Starting salary for absolutely no experience is $9.50/hr. After five or so years you’re making around $14-$15/hr.

Funny thing is, all the material except for the ply-wood is imported from China. I wondered why such manufacturing was not done in say Mexico at the fraction of the labor cost. I did not get the chance to talk with any executive, but would really like to know why they choose to keep the plant in the US. Profit margins would substantially increase and liabilities would nearly disappear.

I guess it is one example of a US company that chooses not to sell out to the rest of the world and keep a few Americans gainfully employed.


Jim in San Marcos said...

Hi Malcolm

We are really discussing the wording of what happens. Self employed people pay the whole 12%.

An employee looks only at his stated hourly wage. His real wage from the employers point of view has that extra amount figured in.

The employee does get a break that the self employed don't, the employers contribution is not considered employee income for tax purposes.

Politically speaking, the employer pays the tax. But when you examine it closely, operating costs are a deductible business expense.

Having the employer pay into the fund makes it sound so painless. We can both be right on this one thank you for your comments

Kibitzer 2006 said...


While I generally agree with you, I have to disagree on a couple of points in your first paragraph.

"Once you realize that business does not pay taxes, you begin to see how Congressional thinking can be flawed, the cost is added to the price of the item. The employer doesn’t pay one dime into Social Security or health care, the worker does."

There is a lot of confusion here. There is a popular misconception that any tax (sales or FICA) can simply be passed on (to the consumer or the worker). There is a competing misconception that the employer pays half of FICA and the employee pays the other half (see an earlier comment). Neither is true in general.

A tax is essentially the same as an increase in the price of raw materials. Either increases the cost of the seller/buyer (employee/employer) transaction. How that cost gets divided is a function of how supply and demand react to changes in price. If the slope of the supply curve is greater than (the negative of) the slope of the demand curve, the supplier will bear most of the cost, and vice versa.

A good example is the gasoline tax. At least in the short term, gasoline supplies are pretty much fixed (i.e., the slope of the supply curve is nearly infinite). The demand curve, while considered fairly steep, is not nearly as steep as the supply curve. Thus the price settles out at whatever price is required to reduce demand to the available supply. The result is that any increase or decrease in transaction costs goes to the supplier. If you eliminate the $0.18/gal tax, the consumer will pay almost exactly the same price at the pump (whatever it takes to constrain demand to the available supply), and the supplier will pocket the rest. (To be more precise, the %0.18 probably goes to the oil producers or refineries, not the retail outlet.)

The labor market is not nearly so one-sided, and I don't know who really pays the lion's share of FICA. A couple of decades ago I saw a study that showed that (back then) the employee paid somewhat more than half. That would be consistent with a soft labor market (there's a relatively fixed supply of labor and employees will take what they can get). The disparity is probably bigger now.


Jim in San Marcos said...

Hi Anon 6:29

Kentucky and Tennessee are real beautiful country and quite rural. My cousin bought a farm and 20 acres for 150k 20 years back. He enjoyed it but the wife was lonely so they moved back to the city.

I think you'll see a lot more business call that area home in the future. Those states haven't figured out how to tax big business to death--yet.

I'm Not POTUS said...

I would venture to guess that that small office manufacturer does a good part of his sales with public institutions that require made in America for sourcing. The other reason it exists is because some people still demand quality. There is high demand for American made furniture from Chinas middle and upper classes.

Back to the important part about not making things here anymore....

As long as other nations are willing to trade tangible items for American money we will never get back to the old days. When the rest of the world starts to outbid the US for these things, we will be forced to pay more which will then force the corporations to consider building things at home again.

If Wal-mart can make more money selling made in china stuff in a store in mainland China than it can in Arkansas, it will. Folks in Arkansas will have to make do with what they can make here or outbid the rest of the world with worthless dollars.

We will rebuild, it will take a long time but it must happen.

Anonymous said...

I think the problem is that the Financial Insurance Real Estate (FIRE) sector of the economy doesnt pay taxes on its earnings. This is unfortunate because FIRE sector extracts money from the real economy, manufacturing etc. A common sense tax code would tax non-productive income, FIRE economy earnings, so that investment would flow into the real economy. Michael Hudson is a good source of information about this topic.