Tuesday, September 4, 2012

Cartels, or how corporations and the government gang bang your wallet

Cartel cases and how the mafia states benefit from it.

Prior to the case, shoemakers A and B are the only participants in the market, and sell their shoes for 100 zlitos a pair.

Shoemaker A and B aggree on a price mark of 200 zlitos for a pair of shoes.

This of course is unheard of, as it would've been enough to buy 2 pairs a year ago.

However.. you do need that pair of shoes and you pay for it.

The evil shoemaker (A or B) receives 160 zlitos, and the mafia state gets 40 zlitos (let's assume they have a simple clean 20% vat rate).

Later on, after many complaints, the state will investigate the matter using the zlitos you and every other citizen of zlitland paid in taxes last year.

When that succeeds, shoemaker A and B will both be fined <fine amount> zlitos, which the mafia state will then use partly for your own good, partly for their own good.

So in a sense, what really happenned here is that the state leveraged another tax on the shoes in the following manner :

step 1 : 200 zlitos pair'o'shoes purchase -> 160 shoemaker , 40 state

step 2 : cartel fine  -> -2mil shoemaker,+2mil state
fine amount per pair'o'shoes -> -40 shoemaker, +40 state
(for the sake of the argument, we'll consider it happens after 50.000 pairs have been sold)

step 3 : shoemakers tax on profit -> (120*33%*20% = 8) -8 shoemaker, +8 state
(for the sake of the argument, we will consider a low 33% real profit rate (i.e. before accountance conceals most of it) and a moderate 20% profit tax )

Normal mode -> 100 zlitos pair'o'shoes -> 75 shoemaker (100%), 25 state (100%)

Cartel mode -> 200 zlitos pair'o'shoes -> 112 shoemaker (149%), 88 state (352%)

Now you know why the fines required by the states are always lower than the profits generated by the illegal arrangement...

... and that is what happens when everything else is legal.

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