Dollars and Sense

The recent debate in the news between Mitt Romney and Rep. Paul Ryan and the current administration is interesting.  I am an avid reader of Karl Denninger’s blog The Market Ticker for a while and believe he is closer to the truth in terms of all of the social benefit programs than either major political party wants to admit.

Simple arithmetic, which Denninger does a fantastic job displaying repeatedly, shows the unsustainable fiscal path that we are on.  Simply put, Medicare, Medicaid, Social Security, Welfare, and all of the other “safety net” programs are bankrupting us as a country.  Add the monetary fiddling that the Federal Reserve Board does in to the equation, and not only are we bankrupting ourselves through expenditures, but we are destroying the purchasing power of our currency through quantitative easing.

Medicare is done as we know it.  There is no palatability for higher taxes to fund social programs rife with fraud, bureaucracy, and terrible accounting practices.  The reason for this lack of desire to fund these programs also comes from the simple fact that those that produce wealth for our nation in private industry (whether corporations, small businesses, or single entrepreneurs) refuse to see their margins squeezed any more as it will put them out of business.

Quick aside for business economics lesson.

Let’s say I work for myself out of my house. If I make under $250,000 a year, it makes more sense for me to file my taxes personally rather than go through the difficulty of filing a separate business tax return.  Let’s say that I make about $115,000 a year doing this, which places me in the top 10% of the country in terms of income with an average federal income tax of 28% (as of 2011).

I make a widget that costs me $1 to make in terms of material.  I want to turn a profit.  Since I pay taxes on income, those won’t come into play until I am turning a profit, but I have other hidden costs such as utilities, my housing costs, transportation, marketing prices, etc that will impact my bottom line.  Let’s say that altogether, that makes up $2.00 per widget made.  So my break-even price is $3.00 each.  I don’t want to break even though, I want to make a profit as I stated earlier.  So I price my widget at $7.00 each.  For each widget sold, I earn $4.00.  The federal income tax I pay on those $4.00 is $1.12 each. Let’s say my state taxes are 7%, so that’s another $0.28 each.  Before I can reinvest a penny, I am already down $1.40 per widget.  That’s almost 75% of my base-line cost to make another widget.

Let’s expand that some.  I stated that I made $100,000 selling these widgets pre-tax. In order to make that amount, I had to sell 25,000 widgets during the year.  If my demand goes up the next year, how many more widgets could I make if I invested every penny of profit into making them?  16,250 is the answer because taxes ate up 35% of my income before I could use them to grow my business.  So basically, taxes knock my reinvestment potential down 35% right off the bat.

Reinvestment equals jobs. Jobs in manufacturing my raw materials, jobs in transportation, jobs in marketing, jobs in sales, and jobs in manufacturing.

Bringing it back now.

So how do Medicare and other social welfare programs impact small businesses?  They simply increase the cost of doing basic business through increased taxes.

What I hope to see happen in the very near future is an honest breakdown of where Medicare currently is, where it is going, how taxes will be impacted, how that will impact the federal budget as a whole, and how the demographic onslaught that is about to happen will impact everything.  Oh yeah, the onslaught is the baby boomers – they’re at or nearing retirement age now.  Fiscally, this is a train wreck for us.  We can not kick this can down the road or offset the spending any longer as it is upon us, and unfortunately for the liberals in Congress and the current President, they’ve been caught with their hands in the Medicare cookie jar and the jar is empty.

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