Why You Can't (and Don't) Buy On Price

Today we're looking at prices from free to crazy.

The High Price of Free

We're getting the Toronto Star newspaper free for six weeks. This isn't a gimmick where you pay for Saturday and get Monday-Friday for free. We're getting the paper Monday through Saturday with no obligation. What a hassle. We glanced through a few issues but now the paper piles up in the recycling bin unread. Free has a price: time.

You probably get lots of free email that you don't read but which doesn't annoy you enough to unsubscribe. You probably gave away personal information to get the freebies. The Internet is basically free, but your behaviour gets tracked anonymously through cookies.

You can get library books free but popular titles have a waiting list and a seven day nonrenewable loan period (at least in Toronto). You pay in time, again. Television is free with commercials or ad-free with paid subscriptions.

There's nothing wrong with free, but you pay in some way. If lunch is free, count on listening to a sales pitch.

Different Prices For Nearly The Same

Have you noticed netbooks, the cute, light, inexpensive portable computers? Most models have nearly identical specifications thanks to pressure from Microsoft and Intel to cap the capabilities. For instance, Microsoft is chopping the maximum screen size from the current 12.1" to 10.2" for Windows 7.

Despite the similarities, you'll find surprisingly large differences in usability, design and quality. Unless you buy solely on price.

Think about macaroni & cheese. Prices differ when the ingredients differ. Real cheese costs more than simulated, powdered stuff. You'll also pay more in a restaurant than at home.

The Same Price For Very Different

Houses of the same price differ too. One place may have plenty of washrooms but use cheap carpet instead of hardwood. Or the kitchen may wow you but the guest bedroom may be the size of a large walk-in closet. Or the house may be perfect but on a major, noisy street.

Advisors

Advice differs because the advisors vary in quality. Professional designations and experience are often measures of quality. But not always. Either could be dated or irrelevant.

It's very difficult to identify the best advice since you're dealing with an intangible. Better ingredients usually mean better results, but some people can burn water.

Water Water Everywhere

Tap water is essentially free. That's the source of Coca-Cola Dasani and Pepsi Aquafina, but those brands cost more. Often more than soft drinks, which have the added cost of additional ingredients. If you like spending even more, there's Fiji natural artesian water and glacier water (which we drank free atop the Athabasca Glacier in Alberta).

It's all H₂O but if the choices were placed in front of you, which would you pick? Which would you want to pick?

Even if you normally drink tap water, what do you do when you're parched and there aren't any water fountains around? Price matters but so do many other factors. We don't always pick free or the cheapest.

Links

• Netbooks are seen as commodities ... are you
• Beat your Blackberry (or iPhone) with a Netbook
• Does your advisor have your best interest at heart? (Million Dollar Journey)
• How your advisor fools you (and what you can do)
• Getting what we want by distorting our spending

Podcast (4:11)

direct link | Internet Archive page

HOW EFFECTIVE ARE TAX AUDITORS?

No one wants to get audited. Not even the tax auditors. But they get audited too.

The Auditor General, Sheila Fraser, looked at how the Canada Revenue Agency (CRA) audits Small and Medium Enterprises (SMEs). Despite 5,600 staff focusing on these businesses, earlier problems remain. As taxpayers, we want compliance with the rules to ease our tax burdens, which vary considerably by province, especially for entrepreneurs.

We're talking about big dollars. The CRA estimates there aren't many tax cheaters but those abusers cost us plenty. About $12.7 billion in unpaid tax according to their 2006-07 Annual Report. Of that, about $2.5 billion relates to SMEs.

Overall, the Canada Revenue Agency (the Agency) has made unsatisfactory progress in addressing the recommendations we selected from our previous reports for follow-up.

--- Auditor General, March 2009 Status Report

Sheila found the "taxman" fares poorly in

• taxing the underground cash economy (targeted by 1,000 CRA staff): "about half of its underground economy audits over the past five years did not detect unreported income"
• auditing too many low-risk files

Auditing The Wrong Files

The CRA "has difficulty demonstrating that it is selecting and auditing small and medium enterprises of high risk or priority."

--- Auditor General, March 2009 Status Report

The CRA uses computerized risk assessment to classify tax returns by the potential tax recovery into four categories from low to high. That makes sense.

However, the CRA focuses on low-risk files where they expect a $0 tax recovery. This is like targeting drivers going 0-10 above the speed limit but ignoring drivers zooming past at 50+.

In the last two fiscal years, the CRA audited 87,000 SMEs. Of these, 13% were tagged as high-risk and brought in 41% of the total tax recoveries. However, 56% of the audits were on zero or low-risk files and brought in 39% of the total tax recoveries.

"Available auditors may lack the experience necessary to do complex high-risk files and therefore audit lower-risk files."

--- Auditor General, March 2009 Status Report

What's going on? Among other explanations, CRA says their auditors are better suited to doing low risk audits. Also, audits do turn up problems even where tax recoveries are low. This is like a "broken windows" approach: tackle minor crimes like speeding and littering to prevent bigger crimes.

The CRA does not know why high-risk files bypass audits because the human screeners who make the ultimate decisions aren't required to document their reasons. Screeners favour their own judgement over computerized risk assessments. Human judgement leads to inconsistencies.

The Right Staff
During the Tax Roundtable in the 2008 CALU conference, a CRA official reported difficulties filling two senior vacancies in the Ontario audit unit. Why? The pay scale starts at $40,973 and caps out at $110,779. The private sector pays better. Also, tax auditors would rank among the least prestigious professions. Want proof?

At a party, announce that you're an actuary and people will leave you for fear of boredom. Say you're a tax auditor and watch them bolt even faster and go further away.

Cheaters

The study found that most people know little about the implications of tax cheating, and concluded that more communication would encourage better compliance.

--- 2007 public opinion research by the CRA

Honest taxpayers suffer. Cheaters prosper and encourage others to follow. Until they're caught. Let's see what happens.

Links

• Auditing Small and Medium Enterprises by Canada Revenue Agency (Auditor General, March 2009 | 40 page PDF)
• 2009 Auditor General's Reports Released (KPMG)
• Biography of Auditor General Sheila Fraser (about.com)
• Mope, Gloat or Move: How tax compares by province
• Surviving an audit: two lies and three tips
• photo courtesy of Adam Ciesielski (Capetown, South Africa)

Podcast Episode 37 (5:45)

direct download | Internet Archive page