BASIC ECONOMICS

For those of you who follow me on facebook this is a rerun. Sorry, but with Yahoo, and others FINALLY pointing out that the tax hike going into effect soon is going to effect more than just the 'rich' it seemed an appropriate lesson to re-post.

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BASIC ECONOMICS

I hate it when people talk about “tax the rich,” or “let the government pay for it.” It tells me just how much our educational system has let us down in the areas of logical thinking and basic economics.

Let's take, “Tax the rich,” first shall we? You see the rich don't pay taxes at all. Most rich people are business owners, and business owners do not pay taxes, they collect them and send them up the line. So you as the consumer pay the taxes, THROUGH the business. Let me say it more clearly – all taxes are paid by the end user of the product. Taking the evil oil companies for instance. They make an average profit margin of 9.7% as per CNNmoney.com. That will be a very important figure later.

There are 4 basic line items on a companies budget; cost of goods produced, cost of labor, taxes and regulatory costs, and profit. Every thing a company spends is represented on one of these lines. For accounting purposes they are often broken down into much smaller subdivisions, but that's usually for marketing and/or regulatory purposes.

So let's define our terms I'll bet you can figure most of them out;
Cost of goods produced (COG) – all materials that go into a the production of a given product
Costs of labor (Labor) – simple, costs for labor, and usually the most expensive of the 3 line items
Taxes and Regulatory costs (Taxes) – what the government costs you to do what you do legally
Profit (P) – this is the simplest and yet often most misunderstood cost. In accounting terms it is what is left over after the product is sold, but it is also often maligned as evil or bad. What most people who think of profit as bad don't realize is that often the business owner doesn't draw a salary, to the business owner the profit IS the salary, and if there is no profit his family doesn't eat. If we're talking a huge corporation we're talking the share holders who have to obtain their share of the profits in various ways either through dividends or through selling the stock. Either way the profit is not evil, it is the point of the exercise. With out profit you couldn't live in your house or drive your car or eat food you didn't raise or kill because no one would have been paid to provide these things for you.

So let's make the example of the wildly thought of evil oil companies. Right now gas in the Austin area is about $2.60/gallon. So, while I don't know the exact numbers I can make an educated guess to make my point.

0.85 = COG
1.00 = Labor
0.52 = Taxes (national average)
0.23 = Profit = (COG + Labor + Taxes)0.097
2.60 = Gallon of gas in your tank
39.00 = Filling your car assuming 15 gallon tank
2028.00 = Full tank once a week for a year

So, let's raise the taxes on this evil oil company and see what happens to the costs of filling you gallon can of gas for your car.

0.85 = COG
1.00 = Labor
0.53 = Taxes
0.24 = Profit = (COG + Labor + Taxes)0.097
2.61 = Gallon of gas in your tank
39.15 = Filling your car assuming 15 gallon tank
2035.80 = Full tank once a week for a year

Most of us can live with an extra 15 cents/week so, let's raise the taxes on this evil oil company by 325% and see what happens to the costs of filling your car.

0.50 = COG
1.00 = Labor
1.74 = Taxes
0.31 = Profit = (COG + Labor + Taxes)0.097
3.55 = Gallon of gas in your tank
53.25 = Filling your car assuming 15 gallon tank
2769.00 = Full tank once a week for a year

Now the real question you need to ask yourself before you scream about taxing the evil rich is – can I afford this little temper tantrum? You see the rich are simply going to roll that costs to you, raise their price and maintain their salary percentage. Either that or go out of business. So, you can have high a priced moral statement that costs them nothing and you everything, or cheap gas, and be happy for them that they get to make a living also.