Tax Rates are The Wrong Question:

As typically happens during campaigns, the arguments about tax rates in the United States focus on all the wrong questions.The real questions should be “what lifestyle do you want to live?” and, then, “what is the best route to get there?”

IncomeTaxRatesMitt Romney’s gaffe, describing the 47% of Americans who don’t pay income taxes as free-loaders is forgivable when you consider that the part of America that listens to Fox News regularly hears about it all the time.  The truth is there are people in all income brackets that pay no taxes, but most of them are poor – really poor.  NPR did a great job of framing up this part of the issue here.

I love this graphic from that report:

The Free-loader breakdown

It is an odd myth that has lead the American consumer to believe that controlling all their own money and spending would result in something “better.” Most people are not in a position to make well-informed decisions on all their purchases and most of the things they purchase are not necessarily best purchased by individual or effected by market forces.

You can search the internet and find dozens of people slicing the tax numbers dozens of ways and coming up with justifications for their own personal agendas.  You can say that you would like to pay lower taxes. Of course we would all like to pay less and get more on some level but the getting and giving are more complicated than that.

Personally, having experienced a few other countries with other approaches to this, I prefer to have good civil resources that keep everyone from being so desperate that they lose hope instead of having ultra low taxes and have to live behind barbed wire and armed guards.

Tax Rates in Industrialized Nations
Wikipedia

Real Markets

With the rhetorical overuse of terms like “let the market decide” being used in campaigns and debates I think it would be beneficial to define what real markets look like and when market forces work. Markets are neither magic nor wise. It is a term that describes the cumulative effect of a number of individual decisions made by real individuals.

I currently live in Cleveland where the economy is particularly bad but there is a very real market. The West Side Market has been a place where indicidual vendors come to compete for market share to a very real and identifiable “addressable market.” namely the very real humans that present themselves, cash in hand.

This market has worked very well for a long time because consumers can go there, review a range of choices for the goods they would like to purchase and make individual and relatively well-informed decisions as to which vendor they will use and what price they will pay.

This all works because the consumer who benefits from the purchase has informed choices.  It is very nearly the perfect theoretical market:

  • Choice with frictionless switching
  • Visibility of options
  • Understanding of value by the consumers
  • Feedback from consumers, usually in the form of switching

Lots of consumer goods end up having to make their way in a market with all these attributes, but most “markets” are not so well-formed and lack one or more of these criteria.  There is no “healthcare market” per se because almost no consumer has frictionless choice, visibility of options, understanding of value or any meaningful feedback except perhaps for lawsuits.  0 for 4.

As entrepreneurs, we often try to play against markets to gain at least initial advantage.  We do this because efficient markets drive down price and when you are starting up this is, obviously, undesirable. Once again, we can point to the  healthcare system as an example of what happens when there aren’t sufficient market attributes in place: prices rise uncontrolled.

Being first-to-market with anything can eliminate a couple of those attributes or at least mute them a bit.  Use this advantage to get to a place where you have what you need to compete in a more mature market (like efficient processes, optimized supply chains, or a ton of brand loyalty) – or even better, cannibalize your own market regularly and at a time of your own choosing.

The last bit that I’ll relate here is that markets have, historically, limited how fast things can increase in value.  If something is increasing in value for an extended period of time at better than 15%, you probably have a bubble caused by an inefficient market.