Chapter 62 - Business Friendly

Humans live by trading with each other. Business is the means by which people trade with each other. Businesses provide the goods and services by which we sustain civilized life. Businesses create jobs and income for the people. A vibrant business sector pays plentiful taxes to the government. Plentiful tax gets spent back into society providing infrastructure, facilities, and services to the people. This cycle of circulating money rapidly moving between citizens, businesses, and government becomes an expanding phenomenon that propels the economy from strength to strength. It is a requirement that conditions be conductive to good business. This business friendly environment is not a number that one can dial up in a computer. It is a whole range of little understood factors.

Thumbtack surveyed a wide group of business owners for friendliness towards small business. Three things were important [1]:

  1. A simple licensing system with easy compliance. [1]
  2. An easy to understand tax system with clear rules. [1]
  3. The provision of training and networking programs that help people get their businesses running, help them comply with regulations, and help them meet other professionals in their industries. [1]

There is often a clash of thinking by business operators. On one hand business want regulation to prevent competitors using bad practices. On the other hand, they want government to stop interfering with the operation of business. There is rarely a desire for an unregulated marketplace. There is a general desire for regulations that are easy to comply with. Procedures should not consume unreasonably quantities of time. It is unreasonable that a plumber should waste two days to receive a permit to install a water heater. It is ridiculous that a farmer or transport operator should have to travel hundreds of miles to attend an official vehicle testing center.

Complex regulations advantages the incumbents and unfairly penalize the startups and small operators. Where complex calculations and days of work are required to calculate frequent tax payments, the system is at fault. The system should be that compliance can be organized in a few minutes online.

Sole proprietors are the most overwhelmed by complex regulations. They have to comply with a myriad of rules just to be self employed. Sole operators often give the best business service. They might be a plumber, photographer, limousine driver, or cleaner. These people are badly affected by regulatory compliance as they have to fill all the triplicate forms and the multipage tax forms to earn the income for one family. When a recession occurs and people lose jobs as factories downsize, self employment can fill holes in employment and save on welfare. It is necessary for the protection of the economy to ensure that new sole operators get a soft landing.

As a society, we need growing businesses to lift employment. Small and medium businesses play a key role in the maintenance of employment levels. Most small employers do not have the time and influence to change the regulations and attitudes of the bureaucrats. Bureaucrats must be mindful that they should not play tyrant over the vulnerable small business, just because they had a bad day dealing with the lawyers of a big company. We cannot create a vibrant economy by creating barriers to business. The first barrier is regulation. The second barrier is taxation. The third barrier is a lack of circulating medium.

It must be remembered that vibrant business provides tax for the government to consume in its bloated paper-shuffling departments. To that end, the government needs to assist business to start, operate and develop. Training programs, networking opportunities, and assistance with compliance are important. A high proportion of businesses are recent startups. They have a big learning curve in the provision of service to their customers. Every regulatory requirement is a new learning curve for each new business. We need new businesses and to cause them problems and upset when they get the complex government forms incorrect is counterproductive to a healthy economy.

The new businesses benefit from networking with others in the business and it is useful if local government provides that service. Contrary to current thinking, government benefits from healthy businesses. I shall not forget a conversation on a train from Butterworth to Kuala Lumpur with a water authority manager. He told me that his department automatically supplied system water to every small street vendor, whether they were registered, unregistered, legal or illegal, financial or unfinancial. The reason was that they did not want health issues through the use of unsafe water. It was a ‘no questions asked’ supply of fresh drinking water. Health overruled regulations.

Where there are multiple levels of government applying rules, it can be close to impossible for an operator to know whether he has complied with all rules. Some councils may ban the running of a business from home. Does a plumber with a pickup truck parked in the drive comply with local government regulations? I very much doubt that he would ask the council. If he sets aside a small room to do paperwork, is he contravening council bylaws? You can be sure that I would never ask the council whether this was acceptable. I don’t think anyone would complain about someone doing business paperwork in back room. Why put small businesses in the situation of breaking council regulations to survive. It is very easy for the business owner to be confused. On-the-job-experience is needed to know which department actually applies the rules and which ones can be ignored. Just like parking a car to fetch some eggs, you need to know the likelihood of an official placing a fine on the windscreen. Some businesses need separate licenses from separate jurisdictions to conduct business in adjacent areas. Regulation can become intolerable. Regulations are often imposed by unelected bureaucrats with little ability for business to object. In most cases there is no avenue for redress. Government regulation needs to be analyzed in each instance to see whether the regulation or activity is of benefit to the nation. In the words of Lao-Tzu: “that the secret of good government is to leave the people alone.”

In 1840, Alex de Tocqueville had this to say:

“Democracy extends the sphere of individual freedom, socialism restricts it. Democracy attaches all possible value to each man; socialism makes each man a mere agent, a mere number. Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.”

Government bureaucracy is a threat to liberty. In drafting the U.S. Constitution, the Founding Fathers were concerned about centralized government. They recognized that when power was obtained, it would accumulate. Corruption would follow and eventually subvert liberty. They crafted the constitution to create a balanced government with clear lines between the different levels and functions of government. It was set up this way for a reason. We need to take care not to break the structure. Over the years, the administrative state has grown immensely. Significant changes were made in 1913. The Sixteenth and Seventeenth Amendments to the Constitution were ratified. These legalized the Income Tax at the federal level. From this time the United States Senators were directly elected. This secured unlimited funding for the federal government. It also put the state legislatures in a weak position when defending against federal encroachment. Since that time, the centralized administration has extended its reach into many areas of our lives. When dealing with state and local government, the federal government will offer large financial inducements to obtain compliance. Of amusement, the Federal Reserve bank was set up at the same time. President Ronald Regan asked the American people to help get the Government ‘off their backs’. The result was a report. The Grace Commission Report of 1984 suggests that all Income Tax collected goes to pay the interest on the federal debt and to federal government contributions to transfer payments. [2] This means that all individual Income Tax revenues are gone before any money is spent on services for the people. Mr. Grace also reported:

“Median family income taxes have increased from $9 in 1948 to $2,218 in 1983 or by 246 times. This is runaway taxation at its worst.” [2]

Mr. Grace also reports:

“Tne commission found that: one tnird of all income taxes is consumed by waste and inefficiency; one third is not collected due to the underground economy; and 100 pelcent of all income taxes are absorbed by interest plus government contributions to transfer payments.” [2]

Although the underground economy sounds wicked, it actually does as I suggest and that is: It keeps money moving without being depleted. A hundred dollar bill may do two or three rapid transactions before the government takes one third. There is then only $66 moving to the next transaction. The black economy is actually a healthy way of keeping the economy active.

“Importantly, any meaningful increases in taxes - from personal income would have to come from lower and middle income families, as 90 percent of all personal taxable income is generated below the taxable income level of $35,000.” [2]

“Further, there isn’t much more that can be extracted from high income brackets. If the Government took 100 percent of all taxable income beyond the $75,000 tax bracket not already taxed, it would get only $17 billion, and this confiscation, which would destroy productive enterprise, would only be sufficient to run the Government for seven days.” [2]

“Resistance to additional income taxes would be even more widespread if people were aware that:

This is one random example of savings listed in the Grace Report:

“We found Congressional interference to be a major problem. For example, because Congress obstructs the closing of bases that the military wants to close, the three-year waste is $367 million. In total, PPSS recommends three-year savings of $3.1 billion by closing excess military bases, equivalent to the three-year income taxes of 466,000 median income families” [2]

In 1840, this was Alex de Tocqueville’s forecast of the possible future. He is is contemplating what form of tyranny or despotism might be in store for the future. We are the future that he is talking about. It may be fairly mild form of tyranny with many visible forms of freedom, but the people might behave like timid animals with the government acting as the shepherd. I often discuss whether the passport is a device for freedom or a device for restriction. Many areas are divided by nation-state borders even where the adjacent areas have similar cultural origins and have mixed and traded for thousands of years. If one objects to the status quo one is classed as an activist, a conspiracy theorist, a racist, and other labels that appear to be designed to label the person as a problem and denounce their thinking without resort to logic. Are we drifting towards his ‘soft despotism’ as described by Alex de Tocqueville?

“I would like to imagine with what new traits despotism could be produced in the world. I see an innumerable multitude of men, alike and equal, who turn about without repose in order to procure for themselves petty and vulgar pleasures with which they fill their souls. Each of them, withdrawn apart, is a virtual stranger, unaware of the fate of the others: his children and his particular friends form for him the entirety of the human race; as for his fellow citizens, he is beside them but he sees them not; he touches them and senses them not; he exists only in himself and for himself alone, and, if he still has a family, one could say at least that he no longer has a fatherland.

Over these is elevated an immense, tutelary power, which takes sole charge of assuring their enjoyment and of watching over their fate. It is absolute, attentive to detail, regular, provident, and gentle. It would resemble the paternal power if, like that power, it had as its object to prepare men for manhood, but it seeks, to the contrary, to keep them irrevocably fixed in childhood; it loves the fact that the citizens enjoy themselves provided that they dream solely of their own enjoyment. It works willingly for their happiness, but it wishes to be the only agent and the sole arbiter of that happiness. It provides for their security, foresees and supplies their needs, guides them in the principal affairs, directs their industry, regulates their testaments, divides their inheritances. Can it not relieve them entirely of the trouble of thinking and of the effort associated with living?

In this fashion, every day, it renders the employment of free will less useful and more rare; it confines the action of the will within a smaller space, and bit by bit it steals from each citizen the use of that which is his own. Equality has prepared men for all of these things: it has disposed them to put up with them and often even to regard them as a benefit.

After having taken each individual in this fashion by turns into its powerful hands, and after having kneaded him in accord with its desires, the sovereign extends its arms about the society as a whole; it covers its surface with a network of petty regulations—complicated, minute, and uniform—through which even the most original minds and the most vigorous souls know not how to make their way past the crowd and emerge into the light of day. It does not break wills; it softens them, bends them, and directs them; rarely does it force one to act, but it constantly opposes itself to one’s acting on one’s own; it does not destroy; it prevents things from being born; it does not tyrannize, it gets in the way, it curtails, it enervates, it extinguishes, it stupefies, and finally it reduces each nation to nothing more than a herd of timid and industrious animals, of which the government is the shepherd.”

Some might say that under democracy, we have been drifting towards Alex de Tocqueville’s ‘soft despotism’. It is necessary to guard against this so that our nation remains efficient and competitive. The nature of taxation is important. Humans live by trading with each other. Businesses supply our needs. Businesses receive money and spend it on wages and input materials. Money is transient to a business. A business that hoards money is not operating to capacity. Money was invented by someone as a gift to the human race for all humans to benefit from. Anyone preventing money from fullfilling its designed purpose is doing a disservice to humanity. The act of ‘making money from money’ is counter to the wellbeing of society. Money needs to be available to business to enable the trade on which the human race thrives.

New Messiah says: “Unfortunately, you have developed a money system that favors those that benefit from the misuse of money.”


Almost all tax is taken when money is involved in a business transaction. Almost no money is taken from those that misuse money. These people are the hoarders and wheeler-dealers that pass their time in a competitive game of ‘making money from money’ without providing any useful service to the human race. This diagram shows sources of tax revenue for the USA. Notice that almost all taxes are taken from business transactions or the result of business transactions. Very little is taken from the use of land or property and almost none is taken from those engaging in speculation and the financial activities of ‘making money from money’.

Tax Revenue in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Taxation needs to be softened on business, particularly taxation that restricts expansion. Income Tax and Sales Tax are particularly damaging. Almost all tax is taken when businesses conduct transactions. This reduces the volume of money that is actually circulating. The worst component of Income Tax is the punishing treatment of depreciable assets and inventory. The business spends hard earned cash on these items but cannot claim them as a tax deduction. All income is taxed but only some expenses are tolerated. Depreciation delays tax deductibility for money that has already been spent on fixed assets. Another damaging component of taxation is the treatment of inventory. Money spent on trading stock is an expense that obtains goods for sale. No income is made until the goods are sold. For Income Tax purposes, inventory should be treated as deductible. Taxation of inventory and fixed assets restricts the expansion of business.

The next item is to look at the effect of borrowed money for the purchase of land. Wherever there is employment, a town grows and the government builds infrastructure. Land becomes very popular. To purchase the limited supply of land, people borrow money. The bank creates money using double entry accounting. A credit and a debit are added to adjacent accounts. The result is zero-sum situation for the bank. For the nation there is an increase in debt in the nation and an increase in money. Money, in this case, is virtual bank credit that exists in bank accounts and is rarely converted to government issued cash currency. The result is that land prices rise to the limits of affordability. Affordability for the bank depends upon the income of the borrower. The result is that those with the best incomes will be able to borrow more. House prices rise to take an almost unaffordable portion of a person’s income. Similarly for the business, the land on which the business operates will rise to the limit of the affordability. The business is pressured to pay high rents for land that was provided freely by nature. It is then pressurized to pay high wages to cover the high rents or repayments of the employees. I call this the “Usury of Land”. There is very little tax on land. If tax was taken from land, it would reduce the amount that people pay in rents or mortgage repayments by a similar amount. The tax on income and sales could be reduced which would encourage more business activity. The business activity of the nation would be enhanced by a move away from Sales Tax and Income Tax and toward a Land Tax.

If one buys a silver colored car, one pays sales tax. If one buys a silver earing, one pays sales tax. If one buys a block of silver, one pays no tax. If one buys shares in a silver mine, one pays no tax. There is a bias in the tax system in favor of people conducting financial dealings. It would be preferential to remove the punitive tax on sales and implement a general Transactions Tax at very low rate of about 0.1% on all transactions including the financial transactions. 0.1% is one dollar in a thousand which is significantly lower than the current Sales Tax.

Contract Enforcement

I usually advise businesses: “If a business mentions the ‘L’ word, never do business with them.” The ‘L’ word being lawyer. Some businesses run to lawyers for gain. However, where a dispute arises between two businesses, it needs to be sorted out in an efficient and timely manner, without undue expense. It is difficult for an economy to prosper without an efficient contract enforcement mechanism.

The aircraft industry had a slow start in the USA because there was so much patent litigation. This hampered USA’s military preparedness for the First World War. The government stepped in to sort the issues and get the aircraft industry moving.

The Importance of Credit for Business

A business needs money before it can make money. An entrepreneur who has a dream along with a beautiful idea is unlikely to have many pennies to his name. The usury of land and the tax system will ensure that he has little left after accommodation and living expenses. Some might find a family member to finance the undertaking but most rely on borrowed money. Commercial Banks are vey good at evaluating risk, but they tend to demand some asset backing, such as a house or a wealthy guarantor with assets.

Some random comments:

Raising Taxes

There is often a call to raise taxes to increase tax revenue. The mistake that is made here is that the increase of a tax rate stymies the businesses that pay the tax. If one takes a billion or two from businesses as tax, one is removing money that is circulating. To increase tax collection, it is better to encourage that which businesses do best: sell goods and services. By making the businesses more vibrant they will automatically pay more tax. The easiest way to do this is to ensure that they have plenty of money to circulate. As money is created as credit, you need to ensure that credit is available. The government needs to collect taxes. The government relies on business activity to provide most of the taxation. It is preferential for the government to help businesses survive by not killing them with taxes? In this graph, you can see that as Circulating Money increases, the tax revenue rises. Circulating Money is the portion of the money supply that is actually changing hands on a regular basis:

A graph of the change in Circulating Money USA and its effect on tax revenue. Andy Chalkley. Creative Commons Attribute

The lesson here is that the government needs to consider itself as a partner in business. The government obtains a portion of the profit of the business and part of the income of the employees. To maximize the tax collection it is necessary to maximize the profitability of the businesses and make the task of employing people less onerous. Increased tax rates do not assist with the productivity of business.

Make it Easy to Employ

Businesses that have been burnt with vexatious employee advocate organizations will resist employing people. In some scenarios, one can say goodbye to a rogue plumber, a rogue mechanic, a rogue shopkeeper, but not to a rogue employee. Whilst it is important for a business to maintain standards, it is also important for an employee to maintain the standards that are expected. There is an assumption that employees should be protected from rogue employers. The reverse logic is avoided. The employer should be protected against the rogue employee. As an employer in previous businesses, I felt under constant threat. The employees had resources that they could move against me in what appeared to be a form of vengeance if I took action on a wrongdoing on their part. If they did something detrimental to the business and I took action, I could finish up in court for taking action against the employee.

There is a consensus that employees need to be protected. This is wise but the business also needs to be protected against rogue actions on behalf of the employee. Part of this can be alleviated if there is a clear understanding of what constitutes a dismissible offence. The business needs to write a clear list at the time of starting employment that lists all actions that are considered to be a dismissible offence. They would include unauthorized removal of company property, working whilst drunk, rudeness to customers, and a long list of others. If we are to increase employment, we need to make it easy to employ people and remove the fear of government action when a rogue employee causes problems. Clear requirements for employees are a positive in that employers will be happier to hire more employees including those with a chequered background.

Good Businesses

I find it interesting that some people assume that you run a business to get rich. That is simply not going to work. The owners of good businesses have a passion for what they do. Walk into the bakery and the owner has a pride for his cakes. He likes his cakes to be the best in town and his prices to be competitive. If he accidentally gets this correct, he will do quite well for himself. The reward is a handsome income and respect in the community. The same in a transport company. The owner will have a model of his latest vehicle on his desk and will show you round the yard pointing to his best vehicles. It is the enthusiastic drive of the entrepreneur that lifts the level of our life as humans. Each small-time entrepreneur strives to produce the best product and service available to his clients at an affordable price in a competitive market place. If one goes into business for the purpose of making money, one is going to be disappointed. These business owners are people with passion. For holidays, they go off to far away places to learn more about their field of expertise and network with others of a like mind. Accountants tend not to be good business persons. They do not have the passion for the industry and are more concerned about the bottom line. A business owner with passion will naturally augment the bottom line. It is the passion of the business owner that is needed to build the business, create a corporate culture and encourage passion in their employees. It is only when a business owner has achieved these items that he has any chance of becoming well off. The good business person will realize that it is not untold wealth that brings happiness. To be happy in life, one needs to make those around you happy. A happy clientele and a happy workforce are the best that a good business owner can hope for. Any excess wealth from the business is best spent in creating a better society. A skate park for the young is worth more than a triple deck swimming pool.

The control and regulation of a business sector would be best managed by retirees from the industry. These people have the same passion as the newcomers and can guess ahead the types of tricks that a desperate business owner might take.

Cronyism

Cronyism is the practice of partiality in awarding jobs to friends or supporters, particularly in politics. Cronies are appointed to positions of authority, regardless of their qualifications or ability. Cronyism happens when the appointer and the beneficiary are in social contract. This practice tends to occur when the appointer is in a weak position. The appointer chooses individuals who will not try to weaken his position or express unwanted views. Cronyism tends to result in an inferior service. Some people joke about this by saying: “It’s not what you know but who you know”. An “old boys network” where members confer favors on each other is an example of cronyism.