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One of my teachers told me to draw a picture to better understand a problem.  So this crude chart is my attempt at making an economic depiction of the value pricing proposition compared to the hourly billing model.  Your service generally has a set value to the client, which is the maximum price they are willing to pay for your work.  If your price is based on hours worked as shown by line P, then as your hours increase, your price increases according to the rate. 

So long as your total hours keep your price under the value line, you will easily collect what you bill, as the client knows they would have paid more and feel they have received your services at a discount to their value.  However, if your hours put you at a price point above the value line, the client will either pay grudgingly or attempt to negotiate back down to the value line.  If you are consistently over this value line, you will encounter haggling with clients who don’t want to pay your price.

If you are consistently under this value line, then you are always leaving money on the table that the client would have given to you if you had asked for it.  This scenario is why value pricing increases profitability.  The efficient service provider is punished in an hourly pricing model (same profit margin with less total revenue), but will be rewarded in a value based model with a higher profit margin and higher total revenue.

Good economics dictates that firms wish to maximize profit, not billable hours.  Be efficient, deliver great value, and make obscene profits by pricing for value.

Apparently we do not have high enough taxes to finance the wealth of social programs that the Congress would like to propose to the nation.  It seems that there has been an unholy appeal to the poor to vote themselves raises on the backs of the ‘rich’ or the corporations who have too much and share too little.  Our nation, once a highlight of individualism and the achievements of rather free capitalism, slips further into socialism as big brother rocks the cradle and the populace drifts to sleep.

Economic crises bodes well for making promises of ‘free’ medical care for all and other ‘free’ or increased entitlement programs to those who feel they are in need.  It’s easy to sell boogieman insurance when people believe there are monsters in the closet. 

It is becoming increasingly clear that regardless of who becomes the next president of the United States, there will be higher taxes, it is merely a matter of the type of taxes levied.  Let us not forget that no matter who the tax is levied against, it is the American people who will pay this tax either directly or indirectly.

I have been contemplating the idea of a national sales tax for some time now.  As an accountant, this would definitely decrease our workload with regard to income tax filings if we were to replace the income tax system with a consumption tax.  However, I can see some real benefits from a national sales tax:

1. Decreased administrative burden on the taxpayer (just like with state and local sales taxes, the administrative burden would be on the business, not on the consumer).
2. Increased dollars for consumption in the economy as the cost of tax preparation is decreased (filing additional sales tax reports would likely be much less costly than the enormous number of income tax returns filed now).
3. Increased efficiency in funding the government (the government is inefficient enough the way it is, they way it collects revenue should not be so inefficient as it is now).
4. More transparency (a sales tax is rather up front when you purchase goods rather than being buried in how one defines income and deductible expenses in an income tax system).
5. Reduced favoritism (there may still be favoritism based on what is defined as a taxable sale).
6. System is still effectively progressive in actual dollars as the wealthy consume more than those with less means.
7. Encourages citizens to save rather than spend (instead of penalizing earning more).
8. May help differentiate between luxuries and necessities (American consumers are confused about the difference between what the ‘want’ and what they ‘need’, progressive rates on luxury items could help clarify this to some).

At the end of the day, the purpose of taxation is to fund the government in a way that does not place undue burden on the citizens.  I do not think it matters much to the citizens the way the government is funded.  However, it seems the government likes to be funded in the way that allows it to exert the most control over it’s citizens.

I was amazed at the grilling Phil Gramm took for observing a fact about the American public.  Tossed under the bus so quick he hardly saw it coming at him.  The fact that Phil Gramm had to be tossed aside so quickly is a testament to the degree of truth in his comments.

The financial hardships being felt by Americans around the country are in no way comparable to those suffered during the great depression.  The metrics on our economy are not great right now (especially if you change the way we calculate a few things), but the wheels have not fallen off yet and we are not suffering a great detriment to our way of life.  Thus I agree that we are over-whining and under-solving with regards to the problems at hand.

We are told by financial advisers to diversify, but we have put all our transportation energy eggs in one basket, and those eggs and the basket come from countries that don’t care about us and may even harbor resentment and hostilities towards us.  We need to diversify our energy portfolio and not look for one magic bullet to solve all the problems.  In interests of national security, we should make sure that this diversification also leads to energy independence so that we can act for what is right in the world rather than for what keeps us moving.

Yesterday the Federal Reserve released doom and gloom comments to the markets.  It seems that they believe the answer to the lack of cash in American’s pockets is to print more money, (rates have been cut by 3.25% since September 2007) so that there is more cash to go around.  Fortunately they measure inflation in a way that makes us appear to have little or no inflation, so they are able to lower interest rates and pretend it does not affect consumer prices. 

Unfortunately, America’s economy is highly dependent on oil, which is traded in dollars, making the Fed’s decisions to devalue the currency even harder on citizens as they attempt to buy the same goods today and tomorrow with an ever depreciating dollar.  Perhaps Americans should start saving their money in Euros until the Federal Reserve gets out of inflation denial.

Twenty percent of US corn production has been diverted to produce ethanol, and it is being heavily subsidized to get it up to speed. Now E-Fuel corporation wants you to make ethanol in your backyard from either sugar or liquor. In an article in Scientific American the company asserts that it takes 14 pounds of sugar to make 1 gallon of ethanol and the company will provide you with bulk rate sugar for between 15 and 30 cents per pound.

If my math is correct, that means that just the cost of the input, excluding the cost of the $10,000 machine, water, and electricity, is between $2.10 and $4.20 per gallon. In the same article the company states that one of its main objectives is for customers to be able to produce ethanol for about $1.00 per gallon. This seems to be unattainable until you consider the possible dilution of the ethanol (the same article states that 65% ethanol is acceptable to fuel an automobile, suggesting water for dilution).

Considering dilution the best possible cost is between $1.37 and $2.73 excluding the cost of the machine, electricity, and water. This also assumes that the company delivers on its promise to provide a source of sugar at the rate of 15 to 30 cents per pound. This may not solve our energy independence issues overnight, but it is at least a step in the right direction, putting power in the hands of the people.

Nothing said here will bring an end to corporate taxation, but I would like for a minute to pretend that it is negotiable to examine its legitimacy and the effects of the system in place.  Our founding fathers waged war with England for taxation without representation, but when we levy taxation against non-voting entities that is exactly what we get.

The corporation is a legal liability shield and capital raising device used to run many American businesses, however, without real people (employees, shareholders, vendors, customers) this legal entity is just a shell.  Most citizens are persuaded by politicians to look at corporations as merely a shell rather than to look at them for the sum of their real-people parts.  Thus, taxation of no one in particular is better than taxation of a specific person, so corporate taxation is popular.

This does not come without side effects as taxation without representation is not entirely true.  There is not legally sanctioned voting representation, so representation comes through the back door with lobbying, political contributions, and good old-fashioned bribery.  The result of taxing a non-voting entity with much money and power is a lot of unethical behavior brought about by the structure of the system.  The answer is not to police the unethical/illegal activity further, but to examine the system that produces it.

An excellent tenant of good government is transparency.  This is another problem with corporate taxation - the taxation of no one in particular.  Who really pays corporate tax (the corporation of course)?  The real people involved with the corporation must pay the tax in some way shape or form, because the shell in and of itself has no income or wages to tax.  The shareholders pay with decreased stock appreciation and lesser dividends.  The employees pay with lower wages and lesser benefits.  The vendors pay with lower profit margins themselves.  The consumers pay with higher prices used to subsidise the tax.

The lack of transparency imposed by corporate taxation may be the worst of all as the government is able to raise revenues with little to no legal accountability.  The group paying the tax is ambiguous, so it is hard to unite an ambiguous group to oppose tax increases or to help in drafting better tax policy (except for the opposition from the corporations themselves).  The opposition comes in the form of lobbying and bribery, which ends up being rather effective, but further muddies the ethical considerations and transparency of government.