How Too Much Government Effects Business
For today's lesson we will use the scenario of neighborhood kids with kool-aid stands.
8 year-old Mikey decides to start his own business and open a kool-aid stand in front of his house. His parents loan him about $100 for a table, chair, supplies for signs and other various stuff, and raw materials to produce his goods. He then determines after all his overhead he will have to sell 100 cups a day at 50 cents a cup to turn a worthy profit. After weeks of work and losing money, he finally manages to get consistent business of about 100 cups a day giving him a profit of roughly $50 per day.
Happy with his progress he decides to hire a 4 friends and expand his business to other areas of the neighborhood. With 4 new locations at about 100 cups a day and after the overhead of paying wages he can draw $25 profit from each location giving him $150 per day total. He's got visions of expanding more and hiring more for his business's future.
One day the neighborhood council informs him he will have to pay a $5 daily business fee as well as pay 20% taxes on revenue. He realizes his profits will drop from $50/$25 to $40/$17 minus the daily fee.. So he decides to compensate for this he raises his prices to 60 cents a cup leaving him a profit close to what it was before.
Due to the price hike he loses customers and is falling short of his sales goals. So he decides to invest money in advertising and raises his prices to 65 cents a cup to cover the advertising costs.
Eventually Mikey works his way up to 10 locations and is doing well and even streamlined his kool-aid production to it's own distribution location and exporting it to different neighborhoods in town. His distribution location seems to be generating as much revenue as all his sales locations combimed.
Again neighborhood council informs him that taxes are going up from 20% to 30% and he will also be required to charge sales tax. Frustrated, Mikey has to raise his prices to 80 cents a cup and again loses customers and is no longer able to make his daily profit goal.
Sometime later the council tells him new regulations require him to make his kool-aid a specific way and a fee will be required to pay for the oversight of said regulation. This means his manufacturing costs will increase once again leading to a price hike on his product to 85 cents a cup.
The council then decides to increase minimum wage so he once again has to raise his prices to 90 cents a cup. His customers are really starting to get upset and begin to look for alternatives. Concerned he may lose his business he decides to outsource his manufacturing process to a cheaper neighborhood and he is able to cut his prices back down to 80 cents a cup and regain his client base. This however put a lot of kids out of work so the neighborhood council pays them unemployment in turn spending the revenue of the last 10% tax increase rendering it pointless to begin with.
To make up for the loss of tax revenue, the council decides to increase taxes yet another 10% to 40%. He has to raise his prices to 90 cents only to lose more customers and revenue. In addition to that the revenue from sales tax to the council also decreases due to lower sales.
Reluctantly he decides to close a few of his locations that just weren't worth keeping open. This puts more kids out of work and more of a burden on the council's unemployment. With the council again losing money they decide to increase the daily business fee from $5 to $10 and increase the sales tax. A cup now costs 95 cents.
Mikey still has a successful business but doesn't see any expansion in his future as revenue is tight and he's barely able to break even. One day the council decides to raise minimum wage again forcing him to raise prices to a full dollar a cup.
Eventually Mikey comes to the conclusion he can no longer sustain a viable business and decides to close all his sales locations in that neighborhood putting many kids out of work. He decides to keep his manufacturing location open and convinces his parents to move to that neighborhood so he can be closer to his surviving business.
The neighborhood now has significantly less tax revenue and is now paying unemployment for a lot of kids who once had a paying job, paid taxes, and consumed goods fuelling other businesses which are also showing decreased sales due to fewer kids with money to spend at their business. Keep in mind those neighborhood businesses are also going through the same hardships Mikey was caused by the neighborhood council.
1. Mikey lost his neighborhood business.
2. Neighborhood council loses tax revenue when Mikey closes his business.
3. Many kids need a new job or rely on their parents putting a bigger burden on them.
4. Neighborhood council has to spend the revenue on unemployment for kids out of work.
5. Neighborhood council has no way to fund anything.
6. Families start moving to friendlier neighborhoods.
7. Neighborhood council collapses with no way to recover.
8. Neighborhood becomes abandoned and turns into a slum area.
Now imagine this neighborhood as your country.