It’s the Budget, Silly.

If you’ve read any of the stuff I’ve written before I started blogging, you might know that my one hot-button political topic is fiscal responsibility. A coworker of mine said something to me today that, to me, demonstrates a either a misunderstanding, or a lack of knowledge regarding financial matters. While this statement had been made a few times in the past, today my brain made the connection with the political arena.

As a professional with at least twice my experience in the industry, I wonder how this particular coworker’s inability to understand the fundamental nature of our own company’s budget can begin to grasp the complexities of a state or federal budget. This particular coworker happens to fall solidly on the liberal side of the aisle and has stunned me into utter silence with statements like, “heck, the U.S. IS a third world country.”

A Little Background

As happens in nearly every other industry, a portion of the work that goes into publishing a book is outsourced to other organizations. In the case of the publishing industry, much of the responsibility for copyediting and the actual layout of the pages is handled by an outside vendor under the management of internal personnel such as me. As is happening in other industries, a portion of that work is being doled out to vendors overseas, in our case, primarily India.

The biggest complication that arises in working with Indian vendors is the culture gap. One of the most frequent cited examples of this is the focus of our Indian counterparts to please their customers. In our case, they prefer to gloss over problems and complications that will effect our schedule, until the very last minute in the hopes they can prevent a delay from occurring. We would much prefer to know earlier so we can make necessary decisions to either accept the delay, or change the request to prevent the delay.

The Statement

I hope by sparing you the details, the situation still makes sense. During a meeting of all my colleagues, we started discussing some of our complications with the Indian vendors, offering solutions, and brainstorming how best to communicate these ideas to all levels on our vendor’s end.

As we were leaving the meeting, this particular coworker said, and I’m paraphrasing, “We could avoid this if we just move all of our work back to the U.S.”

On the surface, this seems like a perfectly reasonable statement. It seems to solve many problems with a single, simple solution.

  • No longer need to worry about the culture gap
  • Saves time on communication because there isn’t a 13.5 hour time difference
  • In a slumping economy, we would be putting American’s to work

The Problem

In a purely theoretical world, concept seems the ideal solution because it addresses a couple of issues. The problem is when the reality of our world sets in.

As with any organization, the resources available are finite. U.S.-based services cost nearly double that of their counterparts located offshore. In order to afford this switch, the company needs to draw the funds from somewhere else. The doubling of costs can’t happen in a vacuum. There are only two possible ways to make up the difference:

  1. Cut costs elsewhere. (Reduce overhead)
  2. Increase income. (Raise prices)

So the question becomes: Are you willing to take a pay cut and/or see some of your colleagues laid off; Or should we increase the price of our product?

If you are, or recently have been a college student, support a college student, or know a college student, then you know all-to-well, the high cost of textbooks. Believe it or not, these prices allow the publisher, the author, and the book seller, only a small profit per book.

The costs to publish a book are extremely high. Each cost incurred has roots in a variety of political topics, most well-meaning, and all with unintended consequences that cost private people and institutions money. Some examples include:

  • Paper costs (environmental regulation)
  • Energy costs (cap and trade only promise to increase this)
  • Personnel costs (minimum-wage regulation, income tax, healthcare & other benefits)
  • Building costs (property taxes)
  • Shipping (gas prices by extension of regulation preventing domestic drilling and increasing refinement capacity)
  • Industry-Specific Regulation Compliance (HEOA)

Drinking the… Lemonade?

So how does this relate to the federal budget? When it comes to taxation and budgetary matters, the primary answers for those on the left side of the aisle is, “Raise taxes on corporations! Raise taxes on the rich! Cut Military Spending!”

Let’s simplify matters by using a very simplified budget for a Lemonade Stand. In this example, each day is the equivalent of a year for illustration purposes. Just keep in mind that the math is the same when we talking millions, or billions, instead of hundreds.

Gray’s Lemonade Stand:

  • Total Budget = $100

The Total Budget is the sum total of all of business expenses I need to serve lemonade at my stand each day.

  • Salary = $50

Salary includes the actual money I pay my salesperson, their benefits, including healthcare, and the company’s portion of their income tax referred to as payroll tax. If you have ever been self-employed, you would know that you essentially pay twice the amount of income tax you would as an employee. This is because the hiring company pays for half of the overall “income” tax in the form of the payroll tax.

  • Overhead = $30

The Overhead includes rent or mortgage and property taxes and power.

  • Materials = $20

The Materials covers the costs of the actual goods sold. This includes our lemons, sugar, water and cups for us to make 100 sales.

Now that we have our budget in place, we know that we want to make a fair profit so we price our glasses of lemonade at $1.15 per glass.

At the end of our first day we make a healthy profit of 15%. This means that we now have $115 for operating our next day. Now the government comes in and says that we owe them 25% of our profit to pay “corporate tax.” So we need to deduct $3.75 from our profit.

But, before we can start the day, however, we need to provide our employee their raise. The average daily raise is 3%, so we need need to increase our budget by $1.50. The town comes to us and say they need to increase our property tax to pay for the next school day, they need to increase their rate 5%, so we need to add another $0.90 to our Overhead. The lemon sellers tell us that because of fuel cost increases, they need to raise their rate 5% as well. So we need to add another $0.50 to our Materials.

While we finished the previous day with a healthy $15 profit, in order to run the business the next day I need to start the day with $106.65. If I leave my prices at $1.15, I am only going to bring home a 7.5% profit today. If I’m going to keep up with my daily increase in expenses, I need to raise my prices on my customer every day.

This doesn’t begin to discuss such real-world business necessities such as Research & Development to create new products and remain competitive, and marketing needed to keep and expand a customer base.

Companies Don’t Pay Taxes, You Do.

Every time the government at any level, increases a tax (e.g. income, property, school, sales), or levies a new tax (e.g. cap and trade), the money to pay these taxes needs to come from somewhere.

A company does not just have money in a vacuum. They have income and they have expense. Taxes, by definition, is an increase to the expenses for a company. So if you raise “corporate tax” in order for the company to continue to survive and grow they need to either decrease expenses elsewhere (usually in the form of layoffs, wage freezes, decrease in benefits, or as is happening more and more, moving operations to a new location (out of state or overseas) or increase income (in the form of increased prices to the consumer). The “corporate tax” is just a shell game.

If the federal government levies taxes on a company such as GE, you and I have to pay more for their appliances. Eventually it gets to a point where a company such as Samsung can provide the same product for substantially reduced prices because their expenses are lower by being headquartered overseas.

Then Tax the Rich!

Aside from corporations, the next biggest target of the left are the rich. The image the ‘tax the rich’ crowd conjures for me is Scrooge McDuck sleeping on a bed made of cash and swimming through a vault filled with gold coins. As if the rich sock away money just for the sake of having money.

Unlike the middle-class, the upper-class affect our economy in two ways. The first is through the goods and services they purchase (from spa visits, to yachts, to frequently flights). These goods and services tend to be the product of the lower-middle to mid-middle class: hairdressers, cosmetologists, flight attendants, hotel staff (from the cleaning staff to the management), chefs, waiters, sales people, and manufacturing for everything from clothing to cars and boats to name only a few.

The second way that the “rich” effect our economy is through investment which leads to job creation. The vast majority of businesses, and largest employment base, are classified as a “small business.” These are companies that, depending on industry, have fewer than 500 to 1,000 employees, and earn under $7 million.

The recent controversy in the debate about extending the “Bush Tax Cuts” is about allowing the rate for the families earning $250,000 or more to expire. My biggest problem with this is that this category includes most “Mom & Pop” shops that have perhaps a dozen employees. Because of their company’s legal standing (generally a sole proprietor, S-corporation or partnership), every penny beyond their business earns qualifies as “income” even if they personally cannot afford to take a penny home.

These people are the true economic engine in our country, and yet these are the people who are going to be hurt most by allowing their “tax cut” expire. They are the ones who 4 or 5% means the difference between maintaining existing staff, cutting a job, or expanding with a new employee.

In other words: where the 4% or 5% might prevent the lower class from buying a new pair of shoes, or the middle class from going on a vacation, for those caught between the middle-class and the “super-rich” it means whether or not one of the previous two categories actually earn income at all.

What’s the Answer?

I’ll be honest: I don’t have a “concrete” answer to say cut X by 10% or Y by 15%. As I suspect the vast majority of you, and a vast majority of our representatives at both the State and Federal level, I don’t have a Ph.D. in economics and haven’t spent a lifetime studying trends and the long-term economic impact of political decisions.

However, I do believe I have common sense. Common sense tells me, if I am spending more than I am earning, I need to make cuts in what I am spending. I cannot tell my company that I am going to have them arrested if they do not pay me more.

If I make cuts, I’m not going to start by making cuts in food or electricity. I consider these the basic necessities in life. I would start by cutting back on personal luxuries: vacations, cable, games, jewelry, etc.

Both the State government where I live (New York) and the Federal government, however, increase expenditures every single year without regard to the actual income they receive. This has been a problem under every administration in the last century, so I don’t hold any one party to blame. The government however, tells me I need to give them more because they can’t make ends meet, and have the power to arrest me if I do not comply.

My assertion is they need to first stop creating new programs they need to try and pay for (Federalization of Airport Security, Healthcare Reform), make cuts on the extraneous stuff (Cornhusker Kickback, Louisiana Purchase, unrelated earmarks on legislation), and THEN we can start to look at the core programs the Federal government SHOULD be funding: Military (arguably the primary concern of the federal government), Social Security, and Medicare.

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