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Profits Key to the Economic Climate

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By Lowell L. Kalapa

With the legislative session in full swing, ideas abound in all areas of concern but none so prolific as those aimed at improving the economic lot of the state.

Elected officials are keenly sensitive to the sluggish economy not only because voters demanded that the economic issues be addressed but also because they have finally made the link between the poor economy and the tax revenues they love to spend. A vibrant economy brings in those tax shekels lawmakers like to spend, whereas a poor economy leaves nothing but moths to fill the state’s treasure chest.

So bills have been thrown in the hopper to grant this or that tax credit or exemption for everything from high technology to hotel renovation. Beset with the knowledge (and complaints) that taxes are too high, lawmakers figure that if they propose a tax credit or a tax exemption they will have done something to “make the economy better.”

Unfortunately that kind of thinking is truly indicative of the fact that there is a basic lack of understanding by lawmakers about the rules of economics and the underlying philosophy of our system of capitalism. Indeed the underlying philosophy is that if you work hard, take some risks, you get to reap the fruits of your labor.

Those fruits, if you will, are something we call “profits” in the world of business. Those who have started up or run a business know that without profits, one does not have the money to meet payroll, pay the bills and pay themselves. If a business doesn’t make profits, it sooner or later goes out of business, closes its doors and lays off workers.

Unfortunately for more than three decades the attitude of elected officials toward business is that profits is a nasty word. To many elected officials, businesses who make a profit are “ripping off” their constituents. This attitude gave rise to the multitude of rules and regulations with which businesses must contend.

Again, it is a lack of understanding of how business works, of market competition, of pricing what the market will bear, and the need to earn enough to cover not only the cost of the goods or services being sold but also all of the attendant costs which are called “overhead.”

And will tax savings benefit the consumer or just give businesses more profits? Take for example, two businesses selling the same product and realize the tax savings, one will try to improve his sales by dropping the price in order to sell more (increase volume). Even though the price is lower, the increase in number of units sold will increase the income of the business. On the other hand, the other business may not want to drop his price, taking the tax savings as a way to increase his profits. However, because his price is higher than his competitor, this business doesn’t sell as many of the product because people have found they can get it at a lesser price or cost from the first business.

That is what drives the market economy. Businesses make decisions like this all the time. However, the first question that an investor will ask is: “Will I be able to make a profit?”

Let’s face it, no one invests their hard earned capital in a business expecting to lose money. So the prudent investor checks out the prospects for making a profit. So while tax incentives might be tempting, if the incentive doesn’t apply to your type of business, what good is it? Certainly if the tax and regulatory climate is such that there is no way a business can make a profit, there is little likelihood that a prospective business will even consider Hawaii.

So instead going after “sexy” tax incentives, lawmakers should stick to the “meat and potatoes” of improving the overall business climate and the prospect of making a profit in Hawaii.

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