Economics And Taxation Education – The Laffer Curve

For years, I have thought the American Educational System fails us by not educating effectively when it comes to economics. It constantly surprises me how many people can barely balance a checkbook and yet these same people are expected to make educated and informed decisions when it comes to electing our political leaders. I was the beneficiary of a good public school education by teachers who cared enough to teach me how to read, the enjoyment of reading and encouraged me to do so whenever possible. My parents bought me hundreds of books and several encyclopedia sets. I spent a large portion of my youth reading and continue to do so today. I grew up in and around our family-owned business, had other family members who owned their own businesses and always wanted to own my own business one day. I paid enough attention to what was discussed over the dinner table to inspire my interest in economics, marketing, management and a host of other issues that come up from day to day in business and I guess I got a double-dose of business related education. 

Unfortunately, most kids do not get this type of hands-on education. They are sent to school where they are caught in the cross-fire of competing special interests and the most basic understanding of how the world works somehow escapes them. It’s not always their fault. As our educational system has continued to become politicized over the years, it has become more and more clear to me that there are an awful lot of people who simple don’t have all the facts. For example, when I started my own business, I had lots of people tell me, “Hey, you’ve got it made! You get to make all the money.” And, I’ve had people say, “You must be rich ‘cuz you own your own business.” I have to stifle my laughter when they say this because nothing could be further from the truth. It is painfully obvious to me that people who say these things have never learned how the world of business works, nor do they understand that for every dollar of income that comes into my business there are an awful lot of people wanting a slice of that dollar.

The first people who want a slice are vendors who have shipped products I have sold and if they are not paid, there will be no more products to sell. Next are the employees and as hard as I try, I can’t seem to convince employees that they should be working just because they love the work. 🙂 Ultimately, they want to be paid. Bank loans have to be paid or we’ll have no vehicles to move around in, or if I’ve financed my inventory, they’ll come and take it for payment instead. We have to pay for the overhead expenses like electricity, telephone bills, internet services, subscriptions to trade magazines to continue our education, tools, and workbenches. Rent or the mortgage has to be paid so we have an office, advertising has to purchased so we can promote what we do, and eventually, we will all have to spend some time with the tax collector. Unfortunately, there’s more than one tax collector: Federal, State, City, and County; they all want their cut.

In the end, if a business owner is able to keep even a small slice of that original dollar coming in, he or she is obligated to spend some portion of what’s left on improving the business. They may use it for research and development on new products, or expanding their existing capacity. In the end a business that doesn’t invest in it’s own future is destined not to have one.

It is often frustrating that so many people do not understand even economics this basic. For too long, small business owners have stood by, kept their heads down, did their work and hoped that everything would work out ok. Unfortunately, the ostrich strategy isn’t going to cut it anymore. There are a lot of people who don’t understand economics or taxation; with their own mis-guided ideas of how “rich” small businesses and entrepreneur are; and they appear to be ready to get out the pitchforks to get what they “think” is fair. Therefore, in my small way, I want to contribute something back to everyone who has helped me stay in business since 1982. Because of my association with lots of small business owners, I often am exposed to good educational materials. I’d like to feature some of this material here for others to find and perhaps they can benefit from the information as I have.

Today, I received an email from a friend (a small business owner) that contained links to three videos that were posted on YouTube. These videos provide an excellent explanation of the Laffer Curve. Each video is about 7 minutes long and well worth the time. If you are a small business owner and have discovered educational material like this and it has helped you in some way, please email me here the links to the material. If it is worthwhile, I’ll be happy to publish it in another post.

The Laffer Curve, Part I: Understanding the Theory

The Laffer Curve, Part II: Reviewing the Evidence

The Laffer Curve, Part III: Dynamic Scoring

Hat-Tip to Ed Pierce for sharing. Let me know what you think.