The Lemonade Stand, by Max Pruger

It’s simple. Companies are created for one sole purpose, profit. They make decisions based on how to maximize their profit. In 1955, it was very costly to move a manufacturing facility to China or other places in the world. Today, with a click of a button, a company can export software, patents and jobs. Combine that with the fact that the Gov’t, through the manipulation of the tax code and ridiculous regulations, has created a non-profitable environment for companies to do business in the US. This has resulted in companies moving large portions of their business to other countries. This is a key driver to the numbers he has presented. In addition, because the tax system is so prone to corruption, corporations pay politicians billions to manipulate the tax code in their favor. I would argue that if you look at the tax code in 1955 as compared to the tax code today, and combine it with all the options available for where companies can move to today, America is no longer the best place to do business. Therefore, when companies leave, revenues fall.

Here’s another example. You and your brother, who are fiercely competitive, open separate lemonade stands in front of your parents house. The cost of lemons is 15 cents, the cost of labor is 5 cents and after weeks of lowering your prices to gain neighborhood marketshare you both have settled on a minimum profit of 5 cents, so you sell your lemonade for 25 cents (not price fixing, think Coke & Pepsi). One day your mother comes out and says that you are spilling lemonade all over the sidewalk, so she imposes a 5 cent sidewalk tax on both of you so she can hire someone to clean the sidewalk. You look around and unfortunately the lot across the street is wooded and not a hospitable place to move your lemonade stand so you agree to stay where you are and pay the tax. Of course neither of you will sit outside all day selling lemonade for no profit so both of you immediately raise your lemonade prices by 5 cents making the new price 30 cents. Mom, now gets a 10 cent windfall tax and the “economically challenged” neighbors are ecstatic that the two corporations are finally paying their fair share. Of course these are the same neighbors who buy lemonade every day and are now paying 5 cents more for it but that’s another story.

As you continue to compete for business, you notice that the wooded lot across the street is being torn down, a house is being put up and a nice new shiny sidewalk is being built. You walk across the street and ask the homeowner how much it would cost to move your lemonade stand across the street. They reply 2 cents. Seeing as you have a free trade agreement to sell lemonade across the street, you pack up your lemonade stand and move it. So what’s happened, your income now has now increased by 3 cents and your Mom’s take has dropped from 10 cents to 5. That’s a 50% drop in corporate lemonade taxes. The “economically challenged” see the 50% decrease and force your mom to raise the sidewalk tax on your brother by 5 cents to make up the difference. His cost to produce lemonade is now 30 cents. He has no choice but to raise his price to 35 cents to stay in business. Ah, once again the “economically challenged” are happy, even though the slowly start crossing the street to buy lemonade from you.

But it gets worse. At first you maintain the price on your lemonade and get a windfall profit of an additional 3 cents but then you think. Hey, I can drop my price to 27 cents, maintain my profit of 5 cents and put my brother out of business (remember those atomic wedgies, well this is payback). After a couple days of no customers, your brother has no choice but to move across the street with you. He lowers his tax burden from 10 cents to 2 cents and now you’re once again competing at 27 cents. Your poor mom has lost all of her sidewalk tax revenue. Your sister tries to open a stand but the HOA has passed a law that says any stand opened in front of your Mom’s house is now required to pay 15 cents to not only clean the sidewalk but also to make up for lost revenue. Your sister immediately declares bankruptcy, liquidates her lemonade and asks mom for her allowance, so she can sit on the couch and play video games.

In a nutshell this is what’s happening in the US [and the FairTax can fix it].

~Max Pruger

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Posted in Corporate Taxes, Income Tax
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