Get Rich in Small Business, by Mason Clark My recent reviews of "The Millionaire Mind" and "The Millionaire Next Door" (available on my web page) brought some comments from Mason Clark, who reminded us of his book on a related topic. Mason’s book is available for free on the internet at: http://pw2.netcom.com/~masonc/money/richintr.html I downloaded the book, read it, and decided to post a review. The internet reaches a new level: the virtual review of a virtual book. MY COMMENTS: THE GOOD. First, I like the format. Each chapter is a separate file and each links to the next. This makes it much easier to read. The contrast here is with another book that I dealt with, "Adiposity 101" which is one huge file. I suggested to the author that he subdivide it into 10 chapters, but he did not do that. Overall, Mason’s theme is correct. People in the US today do get rich mostly by founding their own small business. It is better to be the boss than a worker, at least from an economic and statistical perspective. There was a change in the nature of the US economy sometime back around 1970-80 that shifted the source of growth from large corporations and monopolies ("Big Business" --GM, the telephone company, regulated airlines and utilities, etc.) to small companies, some of which grew large. For more on this see: http://www.geocities.com/capitolhill/4834/smallbiz.htm Mason claims that overall, the US tax rate is approximately flat from very low incomes to very high incomes, if you include the FICA (Social Security) "tax". When Grinch posted this claim on sci.econ recently, it generated some discussion, but no evidence was presented to dispute it. Of course the federal income tax is "progressive" in principle, but is riddled with exemptions and deductions to the point that its effect can be determined only by looking at what people actually pay relative to their incomes. Which raises the question: why a complex tax with high rates and exemptions rather than a simple tax with a lower rate but without the various loopholes? The choice seems to be between a complex flat tax and a simple flat tax. Also the book explains how companies, especially small ones, can raise the capital they need by selling stock, either to their employees or to the general public or both. Some on sci.econ have questioned the fact that stock sales raise capital, since most stock sales are from one buyer to another, rather than from company to public. Starting your own company is only one way to become rich: it is not the ONLY way. In the Millionaire Mind sample, while the most common single route to inclusion in the club, less than half of the members had started a company. Most still worked for someone else. I like the explanation of how companies don’t PAY taxes, they COLLECT taxes from their customers to give to the government. While this is most obvious in the case of the state sales tax, many people don’t realize that it applies to corporate profits tax or other business taxes as well. But conventional economic theory says that the extent to which business taxes are passed to the consumer, or paid by the investor, is determined by the elasticity of demand. The more elastic the demand, the less taxes or cost increases can be passed on. At least in the short run. MY COMMENTS: THE BAD The book was written during the 1970’s and while there are some update comments as of 1999, there are still some changes that have not been corrected. POOR CHARLIE? The book compares Charlie the bookkeeper to the company owner, and claims that the owner has all the advantages. But the comparison omitted some factors. Charlie can most likely deduct either $2000 or $4000 per year from his federal income taxes each year, to invest for retirement. The company owner may not qualify for an IRA under current rules, if his income is too high. Also the advantage the book cites for capital gains all depends. The capital gains rate has recently been reduced from 28% to 20% (corresponding to a change in the US budget projection of "deficits as far into the future as we can see", to "unexpected surpluses" ---but that is another story). My point is that Charlie is most likely in the 15% marginal income tax rate, or at worst, the 28% bracket. So the capital gains rate he "missed" is likely no big deal for him. True that back before the Reagan tax cuts, there was a BIG advantage in capital gains rather than income, but today the difference is less unless your income is really high. And (as the book indicates) the rich know better than to have really high taxable incomes. And while I agree that giving the workers a piece of the action through stock options is likely a good thing, they might be better off to buy stock mutual funds and reduce the risk (as well as the possibility of a big gain). When I worked for Halzelton the company had a stock option 401K plan. I bought their stock, it went up in value. I made money but sold the stock to invest the gains in mutual stock funds. I got a good return but was not dependent on the stock performance of a single company. Clark claims that 5 of 6 workers who reach age 65 can't afford to retire. Can that be the case today when that age group is the wealthiest segment of US society? WORKERS: THE KEY TO WEALTH? The book stresses that workers are the key to business success. The more people you (the owner) hire, the richer you will become. Workers are called the "source" of wealth. Gain over $40,000 per additional worker. But this view is of no practical consequence to the business owner. He cannot just hire workers, he must have the business expansion to need them. A business is not successful because it hires more workers: it hires more workers because it is successful. Has Mason confused cause and effect?? GREATER INEQUALITY? As people contunue to follow the advice in this book and start more new small companies, the result will be both continued economic expansion and greater inequality. Because while workers gain from the increase in jobs, owners gain even more from the value of their company. As the book says, the new wealth is divided about equally: half for the owner and half for the workers: all of them together. New business and industrialization increase the wealth gap as explained in this from a recent newsgroup thread: jim blair: >>But when a factory is opened in a poor country, won't that mean a less equal >>distribution of wealth? Some people will have the (higher paying) factory >>jobs, and some won't. Mason Clark: >Has capitalism given us greater inequality than feudalism? Hi, I think it clearly has. Even the Kings and Lords of the middle ages were poor by modern standards. But the poorest people today (3rd world mostly) are about as poor as the poor then. So the spread today between rich and poor is much greater today. ..... > Why not *all* have the (higher paying) factory jobs -- and broaden > "factory jobs" to "capitalistic jobs." ???? Depends on what you mean by "factory jobs". Today ever fewer of the jobs have much to do with "factories". Are teaching or writing or computer programming "factory jobs". At any rate, industrilization and capitalism are creating greater prosperity and greater inequality in the world. And this will contunue, at least in the short run--until most of the world is industrialized. FINALLY Lest anyone think that creating a business and becoming a millionaire is easy, I will conclude with the story of how I failed to become an internet millionaire. Or just to become an internet success story. While teaching back in the mid 1970’s I started taking groups of students to the US Virgin Islands to study tropical ecology and marine biology. When Milton College closed in the early 1980’s and my career as a teacher ended, I continued to organize scuba divers for winter trips to the islands. For details, see my web page at: http://www.geocities.com/thetropics/8092 But it was a lot of work on my part to find people for the trips: talking to dive clubs and UW student groups, showing slides, putting ads in the local and campus papers, etc. But I hung on, putting together trips that were composed of about half new people and half repeats of people who had gone on previous trips. Some people returned 3 or even 4 times. But the repeat students graduated and got married and could no longer find the time or money. Getting together a trip became ever more difficult. Then I discovered newsgroups in 1994. I was the first to post a message to a NG from the UW . I had to search all over campus to find someone who knew how. While many students and faculty read the "usenets" (as they were called then), no one posted to them. When my first post was put on rec.scuba and rec.travel, I expected to be swamped with people interested in a low cost diving trip to the almost unknown island of St. Croix . And while I did get a reply from a guy in Oregon within an hour of the post, I was able to recruit very few people by posts, and I drew some flack from "purists" who claimed that I was trying to use the usenets to promote a business. Then came the WWW and I created my web page. If there had been an adequate response, I had plans to retire early from my state job and spend each winter in St. Croix from Christmas through Easter with divers flying to the island for stays of days or weeks as suited their schedule. While I had limited previous trips to groups of no more than 12 at one time (to all fit in a van), I could have expanded the operation, bought more tanks, and even hired extra workers (like a PADI instructor). I might have grown into a big dive/adventure operation. But it didn’t happen :-( Admittedly accommodations at Northside Valley were less than 5 star, but the diving is excellent and the living conditions look good when compared to the TV show "Survivor". I just knew that the trip would be ideal for budget conscience students and young adults. And I was one of the first to rely on the internet, surely the technology of the future. And hiring additional workers would not have made a successful business from it. But had it been successful, I could have expanded and hired additional workers. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth. For a good time call: http://www.geocities.com/capitolhill/4834 COMMENTS: Mason Clark: >On another subject: the relation between employees and the >business of getting rich. There is no use my discussing this >outside the context of my book. The book is targetted at >persons who have a skill they can develop into a manufacturing >company. This has nothing to do with wealthy authors, entertainers, >gamblers, etc. The book, I hope, makes this clear. Hi, I did not see any restriction in your book to "manufacturing". It seems to me that your book would apply to a wider range of small business including service and information: the "dot.com" and other computer programming and software, as well as catering, swimming pool cleaning and repair, lawn care, plumbing, housecleaning, and dozens or other types of business. I know a barber who is quitting Cost Cutters (a large shop here in Madison) to start a smaller barber shop business. Excuse me, not a "barber shop" but a "hair styling solon". That is like a barber shop except they can charge more. Today sucessful doctors, lawyers and even authors and athletes are forming corporations to manage their assets. When the Milwaukee Brewers and the Toronto Bule Jays were dealing over the services of 3rd baseman Paul Molitor, I was amused to read that both teams were talking not directly to Paul Molitor but to representatives of the Paul Molitor Foundation. They pay Paul Molitor a modest salary (taxable), and use income from the foundation (provided by the American League) to pay the various expenses (tax deductable) of Paul and his family. Starting a small business has moved way beyond just "manufacturing".