Corporate Profits Are Not Evil

Wednesday, February 25, 2009

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.

3 comments

The Law said...

You know, you bring up a point I had never considered, even as a shareholder in Aflac and Pepsi co. I get my dividend statements and brochures in the mail, but I don't actively participate in their functions, which is my bad.

Also, despite my liberal tendencies, however, when it comes to big business, I am pretty right of center on the political spectrum. I consider myself to be a captialist, and truly do believe that big business shoul do well. So you are absolutely right about is we really should cheer for corporate success.

However, I think the problem wth big business in the context of this crisis is businesses are using their own money to go on these junkets and buy jets - sort of (citigroup is a bit different for example, the new Mets stadium has been in contruction for a whole season - several months before the S hit the fan!)

Left to their on devices, many companies that received bailout money would have gone bankrupt and ceased to exsist with out taxpayer funds. So their buying jets, and decorating their office with a million dolloar toilet is analogous to getting a loan from your mom to pay the rent, but you go and spend that money on a playstation 3 and a trip to Atlantic City. Meanwhile, your mom is picking food from a garbage can because she gave you the rest of her food money.

I truly believe in big business - hell, it has been my goal to run one since I was 11! - but in a difficult time, when the president has this call to brotherhood... we all gotta dig in deep and brave the storm together, and these CEOs do these lavish things, it sends a signal that we're not in this together. And I think that is truly the issue at hand here.

In any other case, I'd have to agree with you 100%, but to answer your question I definitely think it is a CEO problem.

I greatly appreciate your point of view however - I think there is a lot of merit to your stance, and the anger people feel makes rational thoughts like these fly under the radar.

February 27, 2009 at 7:03 AM
The Law said...

**correction** "However I think the problem with big business in the context of the crisis is businesses are NOT using their own money..."

February 27, 2009 at 7:07 AM

I figured most people could agree on this one ;) I agree with the lavish living. However, I think we should be fair and be equally upset with the lavish entitlement mentality in Washington. That is more where my anger is I guess. It's ultra hypocritical to have hearings that accuse when the accuser is equally guilty. It's a republican and democrat problem. We just have to keep voting them out until we find some people with some sort of moral fiber.

February 27, 2009 at 7:23 AM

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