Forums: Discussions for entrepreneurs and small business.

I have a general sense of the term, but if someone with an economics background could explain this, I have one main question: is labor a part of value added?

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Tiana Nelson, MBA, CMA, CFM
Summit Executive Center
http://www.summitbldg.com

In the world of real estate, the term Value Added will be a key component of development in this tight economy. 

 

By way of example:  If you own a piece of real estate, and you can add value to that real estate by building additional footage of space or other creative approach, the given that you already have the existing piece as equity to draw upon, the odds are you’ll have the best chance in this market to get financing. 

I`m reading "The Zero-Sum Solution," where Thurow speaks about a bi-annual bonus system for wages. The formula would be a percentage of the value added.

I get that value added is the difference in costs and selling price, but he implies that calculating the value added is a simple process. Calculating `profit` isn`t such a simple process, due to the way people manipulate numbers to show profit or loss.

So I`m reading above and assuming that labor is indeed part of the calculation, right?

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Shane Eloe, CPA
http://numberinsights.com

Shane, I went back and re-read the definition in the book, and Thurow sure seems to be saying that labor is not included. It`s the sale price minus the cost of materials and components. That speaks to DMI`s example, of building a real building on piece of land.

But does the labor in making that building count, or is only the lumber, nails, concrete, and other materials.

Yet Wikipedia includes labor. So I dunno...seems pretty confusing to me. For it to be a very simple calculation, I`m thinking it`d be just the tangibles going into the product, one at a time. I`m calling labor an intangible.

I`m also starting to come to a decision as to what I think about a VAT (value added tax), removing entirely personal and corporate income tax. Thurow makes a compelling argument, and I`m aware of a number of other people who are selling the idea. It`s better than a flat tax, head tax, and sales tax, I think.

So I just want to make sure I know `zackly what`s involved in this value added thingamajig.

Well, we briefly covered the concept in a business valuation course today, and I think I better understand your original line of thought.  If we want to look at the value added by a process (ie conversion of raw materials into finished product) then we would take the gross revenue, less direct material costs.  This removes the fluctuation in the underlying raw materials from the calculation of value for the process. 

So labor is tossed out because it is part of the conversion process that is being assigned value.  The value is therefore, not a value added by the labor but by the processing steps from raw materials to finished products.

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Shane Eloe, CPA
http://numberinsights.com

Ah...that would explain why a VAT would be across the board fair, and would also tax the gray market, and illegal activities. It`d work like a sales tax, but couldn`t be "jimmied" based on arbitrary labor costs and strange accounting methods of profit and depreciation.

Hmm....I think I`m coming down on the side of favoring this kind of tax system. It also wouldn`t allow for government micro-management through an incomprehensible tax code. There`d be a number, that`s it.

One of the interesting things is that taxes are calculated based on sales of product or services. Right now, the government employees sector makes up one of the largerst groups in the working economy. They`re paid by tax money. On the other hand, they sell nothing. Seems to me putting the House and Senate on commission might not be such a bad idea. :-)