What Is Social Overhead?

There is a cost to operate a society.  Just like a business, there is a price to pay to open the doors.  In society, there are no formal ways to manage it.  With no natural controls it becomes quite large.

Suppose I want to buy personal counseling, or any other thing that has no physical cost for you to produce the next unit of production.   Suppose further that you are willing to take time away from something else to provide that for me, but only if you can benefit by $1,000 in your pocket.

To get $1,000 in your pocket you must bill me $2,000 if you pay income taxes at 50%.  On top of that you must pay the national sales tax, HST, so I must pay $2,260 for you to get $1,000.

For me to have $2,260 to pay you, I must earn $4,520 since I too pay taxes at 50%. I must earn $4,520 so you can enjoy $1,000. 

What happens to the other $3,520?

There are only three players in this game.  Me, you and the government.  More to the point, it is  zero-sum gain.  If any one of us gets more, someone else in the game must give it up.  The government gets the $3,520 we are missing.  It is our social overhead.

Presumably we are not so dull as to elect governments that waste money.  (I noticed your wry smile.)  What do we get for it?

We don’t know in detail, but must assume it is good stuff, required and efficiently produced.

To get a sense of details, consider a thought experiment.  If I have a pleasant meal in a middle of the road, restaurant in China, I will come away thinking the meal would cost much more here.  Probably three to four times more.  Could it be that the social overhead in China is much less than here?

Almost certainly so.

  • Regulation of food handling and quality.  Mostly absent.
  • Minimum wage.  Mostly absent and they keep most of it.
  • Food costs.  Less because of fewer quality demands
  • Wine, beer and other alcohol.  Less because of fewer regulations and lower embedded taxes.
  • Municipal taxes on the restaurant.  I don’t know.
  • Costs to account for sales, expenses, payroll and such.  Lower.
  • Other overhead like heat and hydro.  Perhaps more.

The price is lower because the business is more informal.  No big brother watching and helping.

If I consume the same meal in Paris, it will likely be more than here.  More sharing of wealth mediated by the government.

It is a strange world.  We accept social overhead without questioning much, but work very hard to tighten up both business and personal budgets.  We might do better to understand where the big money is going and do something about that.

If you have an incorporated business some non deductible expenses are best paid at the corporate level. Talk to your accountant.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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