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WHERE DO SALARIES AND WAGES COME FROM?- Fanie Brink

The answer to the question about where salaries and wages come from will in many cases be from government or companies or other business ventures.

This answer is, in fact, not correct because the question then to be asked is where are these institutions getting the money to pay salaries and wages? Most answers to this question will, of course, be that the Income Tax Act compels companies, other business enterprises and their employees to pay taxes to the government. But still, this is not the answer where salaries and wages come from because the Act is only the government's vehicle through which the tax is collected.

The establishment of a business venture by entrepreneurs who can identify business opportunities and who are willing to accept and manage the risks involved, “employs” the four basic factors of production, namely land and raw materials, capital (which includes long-term fixed capital, intermediate capital for fixed improvements, vehicles and machinery, as well as operating capital), labour and management to work for the enterprise at a certain compensation which ultimately determine the total production cost of the business.

The compensation is mostly in the form of interest, rent, salaries and wages, while the compensation to the entrepreneur is only one of two possibilities, namely a profit or a loss and is thus not a production factor. In order to achieve the goal of the business and which is driven by the profit motivation in a capitalist economic system, it means that the business must be able to compensate the production factors that it has “employed” from its gross income, while a profit from its remaining income must be realised in order to preserve and ensure the success and sustainability of the business.

This process is also the best way to generate capital to fund further investment in the business and the only way how more employment can be created. It eventually also provides the correct answer to the question of where salaries and wages come from. It also implies that if a business cannot compensate its production factors and cannot realise a net profit, it will not be able to reduce its debt burden and it will therefore not be able to pay its salaries and wages. Job losses will necessarily be the result despite the uninformed and ignorant statements made by political leaders.

The government and business enterprises are therefore only able to pay salaries and wages from profits and on which company taxes and personal income tax are payable.

The fact that the ANC government and the organised labour do not understand how profits are driven and created in this process, has caused several political leaders to make certain statements that companies should not be so worried about their profits and should rather pay their employees more. While they clearly do not understand where salaries and wages come from, there is no doubt that they also do not understand that economic growth can be driven and created by profits. Therefore, it will only be possible to improve the country's economic growth if the government changes its policies and creates an environment within which each business enterprise in all the industries in the three sectors of the economy will be able to increase their profits and thereby their contribution to economic growth. There is no other way in which economic growth is created in virtually all the countries in the world.

In this process, the producers, manufacturers, service providers and other entrepreneurs on the supply side, and the consumers on the demand side of the economy, are in fact the most important role players as the creators of economic growth and prosperity in the world.

However, the socialist and communist doctrines that the ANC government and the organised labour adheres to is the biggest destroyer of economic growth and prosperity that cannot easily be recovered, but the government will never understand it because of its economic policy and ignorance.

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Bothaville

3 October 2018

Inquiries 082 573 5661


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