No More Cash Registers

September 3, 2012

Profit margins plummet these days as market participants make valiant efforts to serve their fellow man despite being dealt crushing blows by the state apparatus.  Bureaucrats and their cronies insist on living high on the hog while everyone around them is being impoverished.  This has one saving outcome, a rush towards what the state refers to as market “informality.”

Think about the cash register.  Why was it invented?  It came into existence because of the threat posed to a merchant’s wealth by petty pilferage of money from the occasional criminal employee.    The cash register could tabulate the total sales and present the safeguarded sales data to the owner via a key which accessed the data and the cash drawer.  The cash register rang a bell so that the owner or other witnesses wandering about would be able to tell whether the employee had entered the current customer’s sale amount into this tabulating machine which was also a cash box.  The totaled data in the machine should equate to the money in the cash box.  This was quite an ingenious idea.  These devices became widely popular before state taxation became the greater aspect of the merchant’s losses-from-theft calculation.  Nowadays, the tabulating – done either on a roll of paper or electronically – becomes a liability when the state looks at the stored data from the machine as a way to hammer the merchant for not paying for a protection racket.  The state can require that taxation information be calculated and stored in the machine along with the data that the merchant wants for himself.   This stored data which is handed over to state-facilitating accountants and auditors is then probed, analyzed, and dissected by the state’s minions looking for ways to extract a percentage of the money from the business owner.

This very problem is what causes a rush towards “informality” in third world countries that have been ravished and ruined by the state that pretends to serve them.   But, this “informality” is not a bad thing.  There is a tipping point in the process that affects most of the economy.  I have been in study groups in the foreign environment where state functionaries have tried to come up with plans to reverse this trend towards “informality.”    This trend which starves the state apparatus and forces it to reduce its size and scope of influence is despised by the bureaucrat.

But there is an interesting natural process that emerges.  It can almost be stated as a predictable formula.  When a significant percentage of the population opts out of the fascist marketplace and enters a truly free market, the crony participants find it very hard to survive.  Why?  Because the profit margins in the “informal” economy are better than those in the state-dictated economy.  Let me give you an example.  Merchants in Ciudad del Este, Paraguay – for the most part -  do not pay taxes.  Yes, the exorbitant sales and income taxes are written into the law books in Paraguay.  They just don’t pay them.  They sell their merchandise with no sales tax.  They don’t pay income tax.  Their neighbors in Brazil are also delighted because they can dodge the oppressive VAT tax in their own country by simply driving across a bridge.

In such a situation, the merchants who think about participating in the fascist tax-extracting economy do a quick tabulation of profits and conclude that the strong competition in the large “informal” market makes it impossible to earn a profit after paying taxes in the “official” economy.

To bring this discussion a little closer to home, let’s say that you are a silver jewelry dealer and live in a town with a 5% non-food sales tax which is computed automatically and added directly to the sales price by your cash register.  As a businessman, you also pay income tax, property tax, capital gains tax, and other taxes and state fees to stay in business.  Just for easy math, let’s say that these taxes slice 20% off of every dollar that you make (even though it’s likely to be much more than that).  Now, let’s also say that you are in a very competitive market, or enduring very hard times because of a government-engineered depression.  This has resulted in very small profit margins as merchants struggle to get customers.  Recently, three of your competitors have gotten rid of their cash registers and moved their silver jewelry businesses to weekend booths at the flea market down by the river where they don’t pay any government “overhead.”  They now decide to get more of the market share – since they can afford to do so – by reducing their profit margin down to 4%.  You quickly lose all of your customers and leave the silver jewelry business (or join the “informal” economy) because you have to charge higher prices to make 20% profit just to cover the theft from taxation.  You can see how this move towards “informality” is a natural process and a good thing.  It expands almost automatically once it reaches a critical mass.  When a large part of the society accepts that they can’t make any money without dropping the taxes to join their “informal” competitors who have lower prices, they quickly opt to feed their families rather than to feed a bureaucrat that doesn’t produce anything.   This “tipping point” has been reached  across the board in various market sectors in many third world countries.  For example, you can walk across the border into Mexico and buy lots of things tax free and witness lots of businesses with no cash registers that would tell on their owners.   Business people in these countries feign misery when representing their industry in government policy meetings saying, “We would pay taxes but, there are so many people in the informal economy that we couldn’t sell anything if we were to add to our overhead by paying taxes.”   Actually, they are overjoyed that the “revolutionaries” outnumber the bureaucrats and that they get to keep their own money.   It is funny to drive through third world countries where the state puts up posters that tell you to just say “No to Informality.”  They usually have a picture of an “evil” business person selling something like CDs, shoes, or bread under a tent by the side of the road.  What is the formula that explains when this “tipping point” is reached?  When do most participants “opt-out” of the official economy?  Well, it has not been studied precisely (because the state doesn’t like to discuss the notion), but it appears that, in a sizeable market (with multiple competitors), it is around 10% – 20%.  If 15% of the competitors go “informal,” then they will soon get most of the business by the mere fact that their profit margins are higher and they can afford to drop prices to obtain market share.  If 15% of the bakers in a society choose to sell bread at the swap meet and don’t collect tax, then the others will have to choose to do the same or face extinction.  When the critical mass is reached, then the entire economy moves largely towards “informality.”  This is actually a huge concern to the state although little is said of it.  When it is discussed in high official circles, the conversations are rabid and the usual menaces of money-laundering, drug dealing, and terrorism are thrown around as concepts that can be attached ideologically to the informal economy to try to sully the participants.   The nefarious term “ungoverned spaces” is also used dramatically in these meetings and in official communiqués – as if such a scourge as “ungoverned spaces” would naturally make your heart skip a beat with fear and dread – with no further explanation needed.

The state offers various solutions to the “problem” when it is discussed.  It is said that more spending (from more taxation) is needed “to strengthen state institutions” and to improve tax enforcement and that more state spending is needed to research new economic opportunities for the poor deluded people who have fallen off the track of collective state “prosperity” and succumbed to the evils of “informality” because of the “ravages of poverty” – as if man’s true noble nature is to be ravaged and impoverished by bullies using a self-granted monopoly of theft and force established in the neighborhood to run a protection racket.

Some of the fantastic benefits of “informality” are an improvement in our personal finances, a reduction or elimination of unnecessary undeclared wars, and a reduction of other meddling in our lives since the state doesn’t have the funds (extracted from us) to pursue its goals to create imaginary relevance for itself.

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