Punishing Productivity

Today, I heard a fairly interesting story from a manager at an industrial plant that I wanted to share with everyone. The events in the story are true, but the names of the businesses involved are invented.

Recently, Hamilton Motors sold one of its products to Norland Lumber. The salesman from Hamilton Motors told the manager from Norland Lumber that Hamilton Motors actually lost money on that particular sale, somewhere around $30,000. Not only did the salesman say this, but that was the actual number which he recorded on the final balance sheet that would later be used to tally all business expenditures and revenues for tax purposes. The manager from Norland Lumber said that he would need another engine in the upcoming weeks, so the salesman and Hamilton Motors could re-price the second motor appropriately. As it happened, the original motor was sold at a price of around $90,000, so one would expect the price to increase to at least $120,000 to break even. When the time came, the manager from the Norland Lumber returned, filled out the proper paperwork, and purchased the new engine at approximately $98,000. In other words, Hamilton Motors still experienced a $22,000 deficit with its most recent sale unless it was able to reduce input costs by unheard of amounts in just a matter of weeks.

Business practices like this would very quickly run a company into the ground (except for banks which can simply receive more money through the Federal Reserve, but that is another matter), but strangely enough, Hamilton Motors is not in danger of bankruptcy. Actually, Hamilton Motors is doing quite well in light of the economic crisis, if surviving is what one would call “well.” So, Hamilton Motors is making money but reporting losses – why?

The answer is simple: tax evasion. The United States has an incredibly high corporate tax rate amongst Western nations (35%), only being surpassed by Japan (40.69%) and other non-industrialized nations in Africa, the Middle East, and Southeast Asia. Furthermore, our corporate tax is graduated in such a way that the most productive businesses are punished for their efficiency and value to the market economy while the least productive and least valuable businesses are rewarded. Therefore, businesses like Hamilton Motors choose to participate in less-than-legal business practices to effectively hide their productivity.

In order to successfully conceal its productivity, however, Hamilton Motors cannot simply juggle the books. It must also act like it is running at a loss so as to avoid attention from the IRS. No new investments in technology, no expansions in the labor force, no new branches or plants, no wage increases, etc. can be permitted if a business is to appear less productive than it really is. Instead, businesses like Hamilton Motors merely hold on to their savings, partially due to the punishment that they would receive for being productive and partially due to the economic uncertainty thrust upon them by the government – it’s not just the government’s rules that change every other year, but the entire game itself. As a result, businesses are afraid to let go of their capital under the fear that, while they may not be under “The Eye of Sauron” today, they may very well lose the government’s favor tomorrow.

With these things in mind, I am going to propose two things very quickly. First, the government should stop interfering with the economy. Preferably, the government should progress toward removing itself from the economy in entirity, but the uncertainty brought upon businesses through proposed regulations, taxes, subsidies, tax breaks, bailouts, requirements for receiving bailouts, etc. does more to harm the economy than to improve it. The pendulum must stop, and it ought to stop on a capitalistic economic system. Secondly, productivity should not be taxed. It is counterintuitive to say, “Our [economy] depended on individual initiative,” and follow by punishing businesses (and individuals) for exhibiting such individual initiative. While it is true that our current political systems necessitate taxes to sustain themselves, taxes on productivity are not the most efficient, nor the most moral way to go about obtaining government revenues. Taxes on consumption rather than production would be considerably better, both in terms of collection and morality. Basically, the two ingredients for a successful recovery are not more government “investments” and regulation, but instead are stability and liberty.

I understand that this editorial is largely focused on the practical, concrete side of economic reform rather than the ethical, abstract arguments for or against these proposed changes, but this was really a matter of convenience in brevity rather than one of priority. I am no moral pragmatist. Pragmatism as a moral doctrine is innately evil, and whosoever uses the results of an action to determine its moral quality is wrong on numerous levels – the man who lives to satiate only the needs of the present moment is sure to die the next. Only when a course of action exists in accordance with Natural Law (individual rights) should the logistical questions of efficiently implementing that course even be discussed. Halting government interference in the economy and stopping taxes on one’s productivity fit the proverbial moral bill, but a discussion regarding the ethics of these proposed alterations can be held at another time.

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