Corporate Profits Are Not Evil

There has been a long and arduous campaign to vilify corporations. We see CEOs with corporate jets, golden parachutes and big bonuses for running companies into the ground. So why shouldn’t we tax corporations for the ills previously listed? After all, CEOs are living a life of entitlement. I am merely crazy for sticking up for the corporations.

Stop! You’ve already fallen into my little trap. Do we have a corporation problem or a CEO problem? The CEO may look like the king of the company and his word is the law of the land. Really, corporations are owned by the stockholders. Who are they? They are you! Your 401Ks, 403Bs, IRAs, mutual funds, whole life insurance policies, 529 college savings plans all invest in companies making you part owner. The problem is that in having more owners, CEOs have been able to exploit the fact that more and more people are buying into corporations.

Back in the day, only the rich could invest. They were the only people who could afford to do so. Therefore, corporations had a few stockholders all of who had time and energy to make sure their money was being invested and spent wisely by the CEO. With the advent of mutual funds and the other investment instruments I mentioned above, CEOs have enjoyed a dilution of ownership. You see, a mutual fund doesn’t invest in a few stock, but many (hundreds possibly). When you purchase into a mutual fund (please note all the instruments I mentioned above work just like a mutual fund), your average investor is looking to the fund manager to get returns. Since the fund is invested in “a ton” of different stocks, odds are you are not looking at the individual companies the fund invests in. Furthermore, you are not exercising your right to vote on individual company issues. Who would have time? One of the reasons we invest in mutual funds is so we only need to look at the manager and not spend precious time reviewing the financial position of every company the fund invests in.

Today’s investment funds own a majority of stock in today’s market. That means there are a lot of voting rights that will never be exercised and therefore CEOs have a bigger pass on their actions. It’s like having a president who won the popular vote 10 people to 3 people. There was no majority of people in the nation that voted for the President. It’s just that only 13 people had the time to vote.

So what’s the solution? I don’t have one for you here! The simple common sense answer is that corporations and how they are allowed to run (ie. Voting) exists by law and therefore should in theory be able to be fixed by law. What is not the right is sticking it to the corporations. Especially through corporate taxes! Corporations do not pay taxes, only people do. There are no corporations in jail for not paying their taxes. The way taxes work in economics is that all entities try and move out of the way of taxes and whoever is least mobile foots the bill. Corporations have the easiest time moving out of the way because they do not really exist. So who gets hit? Part of the tax burden falls to consumers. However, it’s only a little since they are able to stop consuming. Employees are the ones that pay for most of the corporate taxes.

This is how the shell game goes for this tax: I have an imposed cost that I must pay to the government, my reaction could be to pass onto consumers, but they may stop buying. So, instead I will respond by cutting the cost that is easiest to control, labor. Therefore, wages are depressed or jobs eliminated.

So next time you hear about corporate profits, go ahead and cheer, because it means your investments are going to earn money. Cheer because it means more jobs. Let’s stop hurting ourselves with this “let’s stick it to the corporation” mentality. Let’s look at the real issue and the real culprits. It’s the only way things are going to get better.