Different Approaches to Pricing and Taxing

Private businesses, even the large kinds that get blamed for much of the evil in the world today, fulfill a positive role in our society.  In addition to providing products that people value at prices they can afford, successful companies provide employment opportunities and tax revenues, and employees of successful companies buy products, invest funds, and pay income taxes to governments.  So it is in society's best interests to have strong, growing businesses.

Governments, even the rapidly growing and sometimes wasteful kind that anger so many of its citizens, provide certain widely accepted services that need to be funded.  Valid arguments are made about the limits a society should impose on government involvement in the lives of its people, but few suggest that the government should play no role in serving citizens.

To pay employees, invest in equipment, and deliver products and services, private companies need to be able to attain revenue from customers.  Likewise, governments rely on tax revenues to provide services and pay employees.  But the mental approach to pricing products and services that leaders of successful private companies in competitive industries use differs fundamentally from the thinking applied to tax policy by government leaders.

Businesses can choose to price products using a "cost based pricing" or a "price based costing" methodology.  The former involves calculating the current costs of providing a product or service and adding a sufficient amount to provide for the desired profit, and the latter looks to the competitive marketplace for information about the highest price that can be charged consistent with the retention of enough customers to earn an acceptable level of profitability.  In the event that the prevailing competitive price is not consistent with providing sufficient profit given the provider's cost structure, the business is forced to control or reduce its costs.  Businesses that don't successfully employ a price based costing strategy either have the luxury of being a monopoly or they do not survive long.

Speaking of monopolies, government leaders appear to only use the cost based pricing method to securing funding from taxpayers.  All too often the deficit and long term debt debate is centered around the "fairness" of proposed cuts to various well meaning programs.  Government leaders seem to be saying they have calculated the cost of the programs they feel the government should provide and they are providing the taxpayers with the bill in the form of a proposed tax policy.  The leaders of an organization faced with competitive pressures would be forced to ponder the tax level consistent with conditions needed for an economy expected to compete with those throughout the world and adjust the spending to levels consistent with the resulting revenue.

Government leaders will have to adjust their thinking because we do face competitive pressures from citizens of other countries who want to start and work for companies that provide employment opportunities, life enhancing products, and tax revenues.  Just as customers of private businesses will, all other things equal, choose the less expensive product without regard to the cost structure of the company providing the more expensive one, these global citizens don't care about our cost structure and spending preferences.