Econ 101: The Business Basics (September 2008)

Here is the basic model for a business.

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The idea is that the money trickles down from the upper tiers down to the lower. The business owner will either use their own money or take out a business loan to start a business based upon the needs of the public (Consumer). The Company is running and now we have some expenses that must be taken care of: Government Taxes, The Shareholders, Business Expenses, and of course The Employees. Once the business is running on its own, it is the Consumer who is the main, if not only, income to pay for all expenses for this Company.

The basic idea behind this is that, given the fact that the expenses needed to run the company are usually fixed, if you increase the amount for just one of the expenses, you must either do one of two things in order to keep the business afloat.

The first would be the easiest; the Consumer pays an increased amount on the product made in order to compensate for the increase of one of the Company’s expenses.

The second option; because there is a limit to how much the Consumer would be asked to pay, in order to keep the business afloat, one or more of the other expenses has to be cut back in order to keep things going:

• State and Federal Government Taxes: This is an uncontrolled percentage of the total income made by the Company. This is usually the main reason for income/expense adjustments for businesses. This includes permits, property taxes, etc.
• Shareholders: If the Company has enough growth, more people will invest into it. The idea here is that every business quarter, those investors hope to see some positive return from your Company. These investors can be private individuals or even the company’s very own employees (401K) or pensions from other businesses that grow through the success of this Company. Should you cut from this expense, you affect every single person in this category, their investments, retirement, and hope for the future.
• Business Expenses: This category ranges from maintenance, research and development, business travel, supplies for your product, etc. Basically anything necessary to help promote, or continue your Company. If another expense increases, something in this category has to go to make up for it. The issue here is figuring out how your Company will be affected if something here is cut out. Also, this can cause a shift in income/expenses as well. If a Business Expense’s price goes up, one of your other main expenses has to be cut back as well to make up for it.
• Employees: Wages, raises, bonuses, health insurance, parking, break times, etc. Most of these are necessary to keep your employees minimally happy enough to work for you. Usually, if the Consumer will not pay an increased price, the Company will lower its expenses by laying off some employees, or reducing benefits in order to keep the Company going. This expense category can also affect other expenses if it is increased by, current example, the minimum wage. If the minimum wage is raised, another expense category must be adjusted to make the difference.
• Entrepreneur: This is the income that you make for yourself, set after all of your initial expense categories have been set. This can increase if more income goes into the Company, or if you are greedy and have poor business knowledge (decrease your other necessary expenses to keep a large income, thus eating your Company out from the inside). This can also decrease if you have no choice but to decrease your salary to make up for another increased expense. If you find that your salary has to decrease low enough that you have to worry about your personal lifestyle, that is when it’s time to either sell the Company or close up altogether.

The reason why I wrote all of this is simple. I felt it necessary to educate many of you in how business is started and maintained. In our current system, the United States is the leading nation in corporate taxes. We have the highest tax rate in the world which is an expense on American based companies. Therefore, as I’ve shown above, something else must be adjusted in order to keep those companies afloat. In the extreme cases, these American companies have had to be sold to foreign interests, outsource their employees, or move to another country completely (where employees and taxes are cheaper). This affects every single one of you reading this now. You are either a business owner, shareholder, consumer, or employee. After reading the above, consider the following.

Now both political parties have different methods of saving the economy:

• One proposes tax cuts (reduction in the amount taxed) for businesses in order to stimulate the economy and make it favorable for American business to stay/return home and thus create more job opportunities domestically.  The idea is that, the more money that is free in the economy, the more spending can be done to stimulate the economy.
• The second candidate proposes taxing both the individual business owner (because of the amount of income they have), the business itself (Capital Gains Tax: which the Consumer pays), and at the same time, increases the amount of money that the middle class (Consumer) have. In effect, this plan leaves the system in equilibrium, meaning, that nothing will change in the economy.

Here’s a silly question: Which party has a better economic stimulus plan? Happy voting, more observations to come.