The next day, you receive a delegation of the government. They explain that mining in this country is done under certain clear government regulations. When you export your rough diamonds (as you are doing for 100%), the government levies a small export tax of 5%.
Lately however, the government is under increased pressure to create more jobs, and they are considering the idea of promoting a local cutting industry. In order to achieve this, they need your “co-operation”.
The new policy will be that the export tax on rough diamonds will be increased to 10%. On the other hand, there will be no tax on rough diamonds, supplied to local cutters, and no export tax on the finished product, which they export.
You try to explain that this comes down to selling to local cutters at a 10% lower price, and they make you understand that this is exactly the point. By selling to local cutters cheaper than to the foreign ones, they can compensate their lack of experience and compete. This reduction of 10% in your overall earnings is exactly the co-operation that they have forced you to give.
On top of that, in the new government regulations, you will have to offer goods to local cutters first, before you are allowed to export them. Your assistant explains that, in this way, your loyal foreign customers will be disadvantaged, because the most interesting rough stones will be picked out by the local cutters.
Well, says the representative of the government, that is exactly the point: we are supporting a new local cutting industry.
Again, that evening, you have trouble finding your sleep. Percentages keep racing through your mind. But the end-result is always the same. If your foreign customers used to pay 100, of which 5 were the old export tax, that would leave you 95 net. With the new regulation, the local cutters buy the best rough at 90. And if you are lucky enough that the foreign cutters still want to pay 100 (even though the best rough is not included anymore), with the new export tax of 10, you will only have 90 left. All in all, with the same investment, work and output, the government has just taken away 5% of your turnover.
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