Mitt Romney is right: corporations ARE people

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.

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About Geoff B.

Geoff B has had three main careers. Some of them have overlapped. After attending Stanford University (class of 1985), he worked in journalism for several years until about 1992, when he took up his second career in telecommunications sales. In 1995, he took up his favorite and third career as father. Soon thereafter, Heavenly Father hit him over the head with a two-by-four (wielded by the Holy Ghost) and he woke up from a long sleep. Since then, he's been learning a lot about the Gospel. He still has a lot to learn. Geoff's held several Church callings: young men's president, high priest group leader, member of the bishopric, stake director of public affairs, media specialist for church public affairs, high councilman. He tries his best in his callings but usually falls short. Geoff has five children and lives in Colorado.

35 thoughts on “Mitt Romney is right: corporations ARE people

  1. I heard that exchange on the radio and was struck by the failure to communicate. Romney and his interlocutor were using the same word, people, but it didn’t mean the same thing. To one it meant, “the People,” that mass of humanity who ought to enjoy a greater portion of the world’s wealth. The other used it in the sense that billionaires are humans too.

  2. John is right. This isn’t about who to raise taxes on, it is about talking past each other. Mitt is talking about one thing while people on the other side are talking about something completely different. They may both take quite a moderate approach to taxes, yet education and knowing a thing or two about politics doesn’t seem to help. It in fact seems to get worse the closer to D.C. you get.

  3. John M, your point of different definitions is valid, but what to make of the Dem response: “This is what Mitt Romney is going to run on? Corporations are people? Really?” said Democratic National Committee Communications Director Brad Woodhouse. “There’s a great message for people struggling to get by and trying to make ends meet. Don’t complain — corporations are people too!”

    The endless campaign by the left to claim “corporations are bad” is ignorant.

    By the way, your claim that Mitt is saying “billionaires are humans too” is simply wrong. His point was that corporations pay out profits to actual human beings. In a larger sense, corporations benefit the country by providing people with jobs and products they want. I don’t think you are a billionaire yet you have benefited from corporations all of your life in one way or another.

  4. But note: the higher taxes in no way effect this CEO’s earning power except by giving him a way to earn MORE money.

    I that were true, you would see CEO’s clamoring for higher corporate taxes.

  5. LL, that would mean being fired by the board, as I’m sure you know. The board is responsible for the health of the company, as is ostensibly the CEO. But the CEO also is responsible for his own pocketbook. Higher corporate taxes in no way affect a CEO’s pocketbook.

  6. “I don’t think you are a billionaire yet you have benefited from corporations all of your life in one way or another.”

    True enough; I benefit from many things. In my last job, I tended to like corporate income tax, because the company would distribute year-end bonuses to keep the corporate profit and taxes down. The owners were quite explicit about what they were doing.

  7. John M, exactly right. The corporate tax causes perverse incentives like this. I bet the executives at your company were also taking bonuses. So, as I say, the corporate tax doesn’t hurt the rich corporate fat cats in any way.

  8. And even in the big corporations, they are mostly composed of employees. Taxes do affect corporations. Taxes affect corporate decisions on expanding, investing, hiring, etc. If taxing Corporation A means his company now has to sell product higher than the Chinese can make it, then they have to either eliminate other expenses, lower salaries, stop hiring, etc. If you tax a company harder, then you are making decisions for that company: find other ways to make a profit, such as downsizing employees….

    And last time I looked, employees are people!

  9. Would have been nothing at all wrong if Romney had simply inserted a small phrase: “Corporations are made up of people.” He’d get his emphasis across without sounding like a sneaky CEO.

  10. With income taxes, we look at who brought in money, through luck or hard work, that they didn’t have before and require a portion of it to fund the government. It’s all very sad and painful meriting much anguish and chest-beating, but be that as it may, taking a cut from corporate coffers instead of leaving it there to be used for all manner of glorious corporate purposes makes as much sense as doing the same with individuals. If we didn’t do that, if there were no corporate income tax, then a lot of private income would quickly become locked up as corporate income, another class of earning and wealth accumulation that somehow doesn’t count.

  11. If government is “we the people” so is a corporation. It’s exactly the same as a government institution, except one is public and the other is private. It has elections, has to report, etc. etc.

  12. “I tended to like corporate income tax, because the company would distribute year-end bonuses to keep the corporate profit and taxes down. The owners were quite explicit about what they were doing.”

    I’ll echo what Geoff said. What a terrible incentive. Is anyone really offended if a corporation retains additional earnings so they can accomplish the following:
    – Save for a rainy day — economic downturn in the business cycle — so they can weather the storms and keep employing their workers and providing goods and services to the customers
    – Use those earnings in the company to generate more growth. You can’t grow without cash and you have to invest cash to be able to grow. Less retained earnings means less cash in the bank.

    So, because we hate the idea of corporations amassing wealth and -gasp- being willing to save it or invest in future growth, we reverse-incentive those corporations to only hold the bare minimum cash they think they need for their strategy. If they “guess” wrong on how much cash to retain, they inefficiently lose a significant portion of it to taxation.

    It’s not all bad though, because paying it into the hands of shareholders does allow those shareholders to make their own decisions. But that ignores the wealth generating functions of corporations to begin with. They generate wealth, by investing in things that provide value, which not only benefits all their employees but benefits everyone in the supply chain of their industry. The less they have to invest, the less benefit in the value chain.

    Unfortunately, many don’t grasp this and think it’s either a moral injustice for them not to be taxed or think it’s just fair that some of that money go to provide government services — which completely forgets that the wealth/investment would end up being taxed at some point and generate tax revenue. Only now it’s being taxed before it can provide the most benefit.

  13. From what Chris wrote it sounds like corporations aren’t people after all. They’re special entities that use money to greater benefit than people can, and so taking a portion of earnings from corporations is a worse thing than doing the same thing to people.

  14. It’s difficult to tell where the incidence of the corporate income tax lies, with contradictory studies showing whether labor or capital bears more of it. The question is very complicated. So I am not sure how the breezy conclusions of this post provide any meaningful information about the distributional impact of corporate profits and taxes, which is of course what the Romney questioner was asking about.

    I assume you know, Geoff, that only a very tiny percentage of small corporations organize as C-corps to which corporate taxes apply. This conversation is not about mom and pop businesses. It is instead a real concern about some of our big businesses that use vast public resources (such as the public education built-in to their work force; our government backed highway and infrastructure system; the system of government laws, courts, and relatively transparent regulation that provides certainty in government protection of their property rights, etc.) to funnel the profits into relatively few private hands while, in some cases, socializing the costs and risks.

  15. John M and DCL, it seems neither of you have actually looked at a corporate balance sheet or been privy to how corporations deal with profits. Of course, your viewpoint is wdiespread, thus this explanatory post. Could you please explain to me how a competitive corporation “funnels” profits to relatively few? This is of course what governments and protected corporations do.

  16. Thanks for the love, Geoff, but as a corporate tax attorney at a large law firm, I am quite privy to the inner workings of corporate balance sheets.

    “This is of course what governments and protected corporations do.”

    I’m not sure what you meant by this, but perhaps it is a starting point of agreement.

    The unprecedented and widening levels of income inequality in our country is the best evidence that something is wrong with our business system (by which I mean the vast, money-greased symbiosis between big business and big government). Conservatives should be concerned about this issue because, in the end, it is destabilising to society as a whole. But since you don’t trust my credentials, here is Alan Greenspan before Congress in 2005 talking about rising income inequality: “As I’ve often said, this is not the type of thing which a democratic society – a capitalist democratic society – can really accept without addressing.”

  17. Well, it looks like market capitilization of all the publically traded companies in the world is on the order of $50 trillion. Supposing privately held companies amount to a similiar amount, that’s on the order of $20,000 in capital per person. If capital were held uniformly and the returns on investment distributed likewise, then it would be such a small portion of each person’s income that the taxation on it wouldn’t be worth arguing over.

  18. In this case it doesn’t matter what Romney meant, it matters what the perception is. And when he says things like this it just reinforces what people already think of him. Luckily he won’t have to worry about that perception once Bachmann and Perry start to team up on him.

  19. DCL, you mean the same Alan Greenspan who said the debt is not a problem because we can just print money? Yeah, he has a lot of credibility.

    I am more libertarian than conservative. We may have a point of agreement in that the non-competitive monopolistic corporations that live off the government teet (GM, GE, Citicorp, etc) are ruining American capitalism. But if you are familiar with the balance sheets of corporations, perhaps you could tell me what competitive corporations do with the additional profits they get. I work for an internet provider. I can tell you exactly where those profits go: to more routers, more capacity, more salespeople, more engineers and more marketing people. That tax money sent to the government buys us, what? More missiles to lob at Libya? How exactly does that help the economy? I fail to see in the real world of competitive business where profits are being “funneled to the few.” In fact, the exact opposite is taking place: profits are being given to the many, the new employees and the new technology being bought.

  20. Geoff, it is a great thing that dozens, hundreds, or thousands of people can work together in a corporation. Great for the employees, great for the capitalists, and great for the world that they serve. Let us also agree that taxing income away to feed government is bad and should be limited but is still going to happen at some level. My disagreement with you is this idea that corporations should not be taxed while people are. Pointing out that employees and many shareholders and customers are humans, or that companies use profits for good purpose is rather beside the point. We all want to keep our money, and we all have to give most of it up for hundreds of reasons.

  21. “more routers, more capacity, more salespeople, more engineers and more marketing people”

    Doesn’t money spent on every one of those things reduce your company’s tax liability?

  22. John M, if your point is that taxes are necessary to run society, and you might be in favor of a 10-15 percent flat tax for corporations, then OK, we can agree in terms of “this is probably the best we are going to get in our lifetimes.”

    Despite my flights into sometimes airy fantasy land, I try to be pragmatic, and if you want me to accept that point, then fair enough.

    I will, however, continue to make the point, which I think about 99 percent of the people don’t understand, which is: corporate taxes do not “get the rich guys and make them pay their fair share.” In fact, they do the opposite: consumers pay the cost of corporate taxes. Rich people are not affected in any negative way, and may in fact benefit in ways we both have described. I hope we can also agree on this point.

  23. John M, regarding your #23:

    Two points. 1)capital costs are depreciated over years. Immediate tax breaks help the bottom line immediately.

    2)Here is how business cases work in the internet world (and I think the vast majority of businesses).

    2010 revenue: $100 million
    Costs: $90 million (taxes are included in costs).
    Expected revenue growth: 10 percent.
    How can we grow profitable revenue in 2011? We have 60-70 employees. The sales staff wants three more people. Engineering wants three more, marketing wants two more, finance wants two more, and everybody is crying for more clerical help. What do we get in this economy: maybe one additional employee when we need 10 at least. (This is, by the way, why unemployment is stuck above 9 percent — everybody is afraid of investing in new employees they may have to fire next year).

    Let’s say we pay $4 million in taxes. Let’s say that is cut to $1 million.

    What would we do with the extra $3 million? We might pay off some debt, but the key, the absolute key, to our future success is more network and infrastructure and the people to sell and maintain it. The lower taxes, especially if they were seen a long-term and not just a short-term move, would mean that our growth was completely dependent on such investments. So, yes, we would buy more routers, more transport and hire that additional 10 people we need.

  24. Geoff,

    I don’t care what you say! Don’t be such a dolt! OF COURSE Corporations ARE people!

    Oh, we’re agreeing… Never mind… Just force of habit.

    ;)

    Seriously, I think we don’t give people enough credit if we don’t think this will make a pretty good sound bite for a large segment of the American people. And in any case, it’s nice to see Romney speak a little truth like this.

  25. I think the problem is (and Krugman made the same error in his column today) assuming corporations are only the wealthy. Yet the major investors in many corporations are actually retirement funds. The liberals often attempt to portray corporations as if it was just millionaires. I own several corporations. I can guarantee you from the beat up old car I drive that I am no millionaire. And it really peeves me when corporations are assumed as if they are all like GE or Apple. Sorry. Most corporations are small businesses run by regular people.

  26. PS – the real problem with corporate tax is that to make up the payments corporations increase prices. It ends up being a hidden tax on consumers. I don’t mind taxes but I hate the way most taxes are hidden from the people effectively paying it. I think how we view government would change dramatically if we knew that the prices of much we buy entail quite a bit going to government – well beyond the small sales tax people see!

  27. DCL what is your source for there being such a small number of small businesses incorporated as C corps? I’m skeptical, although I would expect LLC to be the majority. However many, many small businesses have multiple owners such that filing as a C corp is ideal.

  28. Interesting. I think a lot of this is semantics. RP’s position, which is completely valid, seems to be that individuals have rights and responsibilities that are different than corporations. This is certainly true.

    One of the important points from a libertarian pov is: society and corporations do not have rights, individuals do. So, when you talk about “society’s rights” or “a corporation’s” rights, a libertarian would and should respond like RP to say: no, a corporation doesn’t have rights, individuals do. To a certain degree, this is correct. But technically RP is wrong on this one, corporations are people in the sense that they are vehicles that people use to sell stuff or services to other people. And legally they are recognized with many of the same rights as people.

    I also disagree with RP on immigration and slightly on abortion, but I agree with him on most other things.

  29. Granting that corporations are people, one must also allow that, in the same way, unions are people too.

  30. JL, yes and no. Unions have many of the same rights of free speech and association as corporations and people, so in that sense you are correct. Unions are obviously made up of people, just like corporations. But there is no such thing as a “one person union,” although there are 20 million one-person corporations. So the comparison is not 100 percent correct.

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