Taxes and Choices

By Author Tony Demaio 

Once upon a time, there was a peaceful valley where three families lived—the Smith family, the Green family, and the Jones family. Each farmed about the same amount of land; each planted about the same crops; each made about the same amount of money. Each family had an adequate amount of disposable income each year.

Life was pleasant in the valley. There was only one drawback to living there—the water tasted badly. It had been tested and found safe for irrigation and drinking—but it tasted foul. It WAS convenient, though, as it was obtained from a river that flowed through the valley and all three properties.

The Smiths did not like the water—and spent a considerable amount of their disposable income on bottled water. On the other hand, the Greens and Joneses had decided to tolerate the taste of the water and spent their disposable income elsewhere—the Greens on fine wine and the Joneses on gourmet steaks. Each spent about a $1,200 a year thusly.

The families got together once a month or so to discuss items of common interest and socialize. One month, the Smith family proposed putting in a common water filtration system. The other families were not enthused, but said that they would consider it. Mr. Smith said that he would “look into it”.

The next month, Mr. Smith stated that a water filtration plant could be built for $18,000. It would cost each family only about $66/mo. at 12% interest and it would be paid for in about 20 years. Mr. Smith went on to say that the three families could form a corporation and share the costs equally. The other two families were a bit dubious, but agreed to go along.

Mr. Smith made all the arrangements for the loan and the filtration system was installed. Mr. Smith agreed to donate land for the equipment and building. Mr. Green and Mr. Jones would pay Mr. Smith, and Mr. Smith would make the loan payments.

At the next gathering, Mr. Smith presented “Papers of Incorporation” that he had secured from the local stationary store. He suggested that they be reviewed by a lawyer and filed in order to keep everyone safely within the law. It would only cost $2,000 for all the costs. There was some murmuring by Mr. Green, but it was agreed that such would be best. Both Mr. Green and Mr. Jones paid Mr. Smith $666.

At the next gathering, Mr. Green and Mr. Jones queried Mr. Smith about when THEY would be getting the filtered water. Mr. Smith replied, “As soon as you have the pipes installed from the filtration plant to your homes. I’ve installed mine.” Mr. Green and Mr. Jones protested that since the plant was on HIS property, Mr. Smith need only have installed 100 feet of pipe—it would be considerably more than that for the other two. Both Mr. Green and Mr. Jones were quite unhappy about paying $3,000 (each) to have pipe installed for the system, but did so.

Things went fine for six months or so, and then the water started tasting bad. Investigation showed that the chemicals used to filter the water had been depleted. It would cost about $300 ($17/mo each) for a six-month supply. Mr. Green and Mr. Jones asked Mr. Smith about this cost, and Mr. Smith protested that he had not known about it. The company that replenished the chemicals recommended a maintenance contract of $100/mo. ($33/mo each) in addition to the chemical costs.

At the end of the year, the “corporation” received a bill from the state for $350 for ongoing costs of incorporation. ($10/mo each); and they also received an additional bill of $500 for an increase in property tax for the filtration plant ($15/mo each).

About every three years, the equipment broke down. It would cost about $1,500 to have it fixed. Under the articles of incorporation, the costs were split equally. It worked out to be about $15/mo for each family.

Both Mr. Green and Mr. Jones were quite unhappy with the situation. Their total cost now was over $150/mo.—in addition to the pipe and attorney fees. The monthly get-togethers were no longer congenial and often became somewhat hostile. Soon, they became merely “corporate meetings”, with no pretense of being a social occasion.

At one meeting, Mr. Green stated that he wanted “out”, but Mr. Smith pointed out that under the articles of incorporation, Mr. Green was obligated to pay “his fair share” whether he used any water or not.

As time went on, Mr. Green bought fewer and fewer bottles of fine wine, and Mr. Jones bought fewer and fewer gourmet steaks. On the other hand, Mr. Smith seemed to have acquired a taste for fine wine and gourmet steaks.

After fifteen years, Mr. Smith died. His heirs arrived to dispose of his possessions and found the original documents, working papers, records, and letters concerning the corporation. They turned them over to Mr. Green and Mr. Jones. In those papers, it was found that the loan rate was 10%, not 12%; the attorney had charged only $1,000, not $2,000 for the incorporation papers, and Mr. Smith was getting rebates from the repair company, the maintenance company, the chemical company, and had received a rebate from the pipe laying company. There was a cryptic note justifying the costs as “fees for administration”. A letter from the installation company was found that documented ALL the expected costs and fees quite accurately. It was dated before construction was started.

At the next meeting of the corporation, Mr. Green and Mr. Jones talked to each other. One said, “You know, at one time we had a choice of how to spend our money. We could buy water, or steaks, or wine. We got convinced that we ‘needed’ something and gave our money over to someone else to spend and buy that which they said we ‘needed’. In doing so, we lost our choice, and they stole our money. Then THEY had the choice of how to spend OUR money. Not only that, but we USED to have $100/mo to spend as we saw fit. Over the past fifteen years, we spent over $150/mo, in addition to $6,000 to lay the pipe and $1,200 to hire an attorney (about $20/mo each)—which was more than we used to spend on ourselves. You know, I think we’ve been had.”

This entry was posted on Friday, October 16th, 2009 at 9:14 pm and is filed under Authors, Economics, Tony Demaio. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.