moneyFYI
Financial Freedom Is Merely Organized Common Sense
Understand Organizing Principles And Efficiency
The model for dairy farming and a government raising tax money is identical.
The organizing principles
Cows don’t give milk; you have to take it from them. People don’t pay taxes; you have to take their money from them.
You must find the best way to take it.
It helps if you know how to measure achievement.
Operating rules for dairy farming.
Almost every farm is an owner-managed entity. The owner succeeds or fails depending on how well they allocate resources and manage their day-to-day effort.
They emphasize efficiency but are aware of how they allocate their capital. Farmers acquire new equipment or other infrastructure only when it produces more milk or reduces the costs.
They know the price of a barn, milking equipment, feed, and vet services is the same if a cow provides 30 litres per day or 20 litres.
Efficiency aims to provide more milk for the same inputs or the same amount for less cost. Things that matter are breeding the herd for greater productivity in future generations, using efficient equipment, minimizing the owner’s time and capital commitment, using easily digested and nourishing feed, providing clean and organized housing, and maintaining good herd health.
All farmers have an overarching strategic objective. Their idea is to optimize the mix of structure, inputs, and revenue. To do that, dairy farmers keep records to identify variations in their plans. Similarly, I know a poultry farmer who could tell you his business’s feed consumed to meat produced conversion ratio to two decimal places.
Farming involves earning money a penny at a time. Details are how you control that over-arching problem.
All farmers organize for simplicity. Complexity makes it harder to be efficient.
Operating rules for government and tax collection agencies
No one in either government or the tax agency is an owner-manager. Their career success does not rely on the quality of their strategic or tactical decisions. The rules to judge how things are working are opaque and possibly unknowable.
The efficiency is quite good on money collected per dollar of input. The agencies do that by assigning the duty to take money from the taxpayers to others. Payroll deductions, hidden taxes such as on gasoline or cigarettes, and sales taxes are aggregated by businesses and remitted in bulk at almost no cost to the government.
Other tax payments, such as those on capital gains, investment income, and business income, use required instalment payments. Compliance is ensured by audits, the threat of audits, and Draconian collection methods.
There are guidelines for how much revenue must be achieved by a day’s audit effort. Audits have a cost-benefit, or else the targets are revised, and the auditor is retrained or reassigned.
When the audit raises a balance due and the taxpayer objects, the system becomes complex and confrontational. The strategic idea is if it is easy or comfortable to fight the tax agency, more people will do it. In their view, complexity, delay, and discomfort are efficiency-inducing advantages.
The government supervises the law, and that law addresses much more than revenue collection. Governments have found that society-amending economic incentives and disincentives are cheaply imposed by tax law.
Complexity grows as they address definitional detail and expand the nuance in particular situations. The two fundamental conditions for income tax, being what is income and who must pay, are only generally defined. The taxpayer is the one at risk of misinterpretation.
Administratively the government invests in processing capability, communication on the internet, and the assessing of and collection or refund of overpaid or amounts owing. They are respectably good at that.
Governments generally don’t see efficiency the same way as others because it is organized where complexity works in their favour. No employee elected official pays or loses if they are inefficient.
The points to take away
- How much would milk prices go up if the tax agencies’ methods were applied to dairy farming?
- Can you command a cow to give you a particular amount of milk every day?
- How should you define and manage efficiency in a government or government agency?
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, 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. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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