nexteconomy

An Improvement to Employee Discounts with Network Effects

At the Next Economy Workshop, Donald Jackson said he was interested in considering currency designs that would support small businesses since they are especially vulnerable during an economic crisis. Yesterday, Donald wrote Alternative Currencies and Independent Business Wages. In Donald’s analysis, a fundamental problem small businesses have is paying competitive wages compared to large corporate firms. The solution:

Let us suppose that on top of existing base pay, local employers added an extra $3-4 dollars worth an hour for their employees. However, instead of being issued in dollars, let us suppose this wage boost is issued in a local currency that is only accepted by those very same firms. All of the local, independent firms in a network issue the wage increase, but those increased wages can only be spent within that local network.

As businesses compete with each other for employees, a common non-dollar compensation is employee discounts. An employee discount is the difference in price between what is charged to a customer and what is charged to the employee. One might assume this difference is roughly less than or equal to the profit margin. If the employee pays for the employer’s cost of goods, this type of compensation costs the employer nothing. For instance, Microsoft has a company store where employees can purchase Microsoft software for next to nothing. Whole Foods gives employees a 20% employee discount.

Sometimes, if they are close to each other, small businesses will informally honor each others employee discounts. Can we scale this cooperation among small businesses across a region?

As long as the employee provides substantial services to the employer and the employee discount is not “property of a kind commonly held for investment” (Business Tax Answer Book – p. 386), then the benefit is not treated as taxable income to the employee:

Thus, employee discounts on the purchases of securities, commodities, or currency, or of either residential or commercial real estate are not qualified employee discounts and are not excludable from gross income.

It seems to me that a zero interest local currency would not be considered property held for investment. Also, this seems to be a tool that small businesses can use to survive in lean times against large companies whose tools include government subsidies not available to small businesses.

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