Mitt Romney is being criticized for comments in Iowa today in which he said the following:
Corporations are people, my friend… of course they are. Everything corporations earn ultimately goes to the people. Where do you think it goes? Whose pockets? Whose pockets? People’s pockets. Human beings my friend.”
This statement was met by jeers from the low-forehead types in the crowd. You can see the video on the above link.
Mitt is right. Corporations ARE people. If they are not people, what are they?
To be clear, the heckler’s point was that Mitt should raise taxes on corporations. Mitt’s response above was to answer that point.
First, let’s look at what a corporation is. I have started several one-person corporations over the years. The purpose was to limit my liability so that my business activities were separate from my personal activities. You incorporate a business for legal and tax reasons. At the end of the day, my corporation was one person: me.
You can read more about what a corporation is here. To quote: “Despite not being natural persons, corporations are recognized by the law to have rights and responsibilities like natural persons (“people”).”
This is because a corporation is nothing more than a single person or a group of people forming a business enterprise to make stuff or services that people want. People work there and they sell stuff to people. So, yeah, it’s about people.
In fact, there are more than 20 million corporations that are simply one person, and the amount is growing. So, by the most basic definition of a corporation, Mitt is correct, the vast majority of corporations are run by one person and are therefore “people.”
But Mitt’s point is bigger than that. He didn’t express it very well, so let me try with more time and more space. People who know very little about business have this idea about corporations that they are run by men wearing top hats and smoking cigars and plotting ways to pollute the environment and keep down the Working Man. It is true that over the years plenty of corporations have done bad things. But they have also done things like make ipads and computers and routers and cars and, by the way, provide literally billions of people with jobs over the years.
But what happens when you tax a corporation? Does that tax get paid by the big, bad guys wearing top hats and smoking cigars. No, sorry. Those taxes get paid by you. Yes, that’s right, you, sitting there reading this on your computer.
Corporate taxes are simply a cost of business. They have absolutely zero negative effect on the big time corporate executive sitting in his plush leather chair. That guy gets paid based on market rates and how much he can convince the board to pay him. If he runs a successful company and brings in more profitable revenue, he goes to the board and asks for a raise. The only effect that taxes have on him is that higher taxes give him potentially more money if he can show he is avoiding paying taxes compared to other companies in his industry. So, your average overpaid CEO has a great incentive to hire large groups of accountants and lawyers who find tax havens. He also spends money on lobbyists trying to find new loopholes for his company.
But note: the higher taxes in no way effect this CEO’s earning power except by giving him a way to earn MORE money. He pays taxes based on his personal income and based on any capital gains or losses he may have. If he makes $1 million a year, he pays taxes on that. Corporate taxes don’t affect his income in any way.
It is true that some relatively small corporations are run by businesspeople who pay corporate taxes. But, note, they only pay taxes on the income they take for themselves. They may pay corporate taxes if their corporation makes a profit, but this is separate from the income of the corporate owner.
Taxes are simply a cost of doing business and are included along with the other costs. If widget A costs $10 to make, and taxes are an additional $5, then the total cost of the widget is $15. The price is determined by what the market will bear based on what other companies are charging for similar widgets. The company may sell the widget for $40 or it may sell it for $30 — but this price is determined by what people are willing to pay.
So, note that the additional $5 in taxes is not somehow “swallowed by the corporation” and paid by the big wig CEOs or executive. It is paid by the consumer, ie you sitting here reading this. If corporate taxes were zero, the corporation would most likely lower the cost of the item by $5 (depending, of course, on what the market could bear). To be clear, if a corporation could still sell the widget for $40, it would. But the higher margin offers an opportunity for a competitor to come in and sell the same widget for $30 or $28, so lower taxes benefit everybody in a free market.
What about those evil “profits” that corporations earn? Well, I’m afraid to report that those profits go to people too. You may not like them because some of them are richer than you, but the reality is that profits go to people, ie, human beings. When a corporation earns profits, it can either sink the profits into the business to develop new products (these new products will hopefully mean even bigger profits later). Or it can pay dividends, which are payments to people who own its stock. Or its stock can go up (stock is owned by people). Or it can pay its employees, even those fine, upstanding Working Class proletarian employees, more money in terms of raises. It is true that some of these evil profits can sometimes be put in the bank. In the old days people thought this was a good thing because savings are a good thing. Savings are usually spent in some way to improve the business, and having savings in the bank is a good thing for the economy because the bank lends that money out to other people who invest it in other businesses. But the point is that no matter what you do the profits eventually get to actual people one way or another.
So, if you raise taxes on a big, bad corporation, you are only raising taxes on yourself. And, yes, you are a person if you are reading this, so Mitt is correct, raising taxes on corporations means reading raising taxes on people. People like you.