Yes, corporations are people

Steven Horwitz Professor, St. Lawrence University
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“I don’t care how many ways you try to explain it: Corporations aren’t people. People are people.”

So said President Barack Obama in a campaign kickoff speech in Ohio this past weekend. He’s referring, of course, to Gov. Mitt Romney’s August 2011 response to a heckler at an Iowa campaign stop that “corporations are people” — rejecting the idea that taxing corporations to reduce the national debt wouldn’t require taxing “people.”

The tone of the coverage at the time suggested that Romney’s statement was a gaffe that he should retract, pronto. President Obama clearly plans to dwell on it throughout the course of his campaign. But if Romney’s statement was a gaffe, it was only one in the classic Washington sense: a statement that’s undeniably true, but politically inconvenient to acknowledge.

Corporations are composed of people. So are unions. So are universities. So are families. The belief that we can somehow “tax corporations” without “taxing people” is the fallacy at the heart of Romney’s exchange. It’s the same with any collective: If we take away union rights, we take away the rights of individual union members. If we strip a university’s accreditation, we also strip credibility from its students and its graduates.

Romney made this point later in the exchange, asking his heckler where corporate earnings go if not to people. The response he received — “into their pockets” — perfectly made Romney’s case. “Whose pockets?” he asked. “People’s pockets!”

Consider: When we raise taxes on corporations, we raise their cost of doing business. They must recover those costs from elsewhere. Firms can do so by cutting wages and benefits or by raising the prices of their products. One study by Harvard economists estimated that 45 to 75 percent of the burden of a corporate tax increase is borne by workers and another from the University of Michigan found that a 10 percentage point increase in the corporate income tax reduces mean annual gross wages by seven percent. Some corporations may respond to corporate tax increases by reducing their profit margins, which means fewer dividends and lower share prices for stockholders.

All of these options have negative effects on real human beings. If corporations respond to tax hikes by reducing compensation or firing workers, the impact of the tax hike hits the employees. If they raise prices, the impact falls on the consumers who buy the product. And if they take a reduction in profits, the falling stock value lowers the value of various investment funds on which millions of Americans depend for retirement and other income.

In other words, there is no such thing as a corporation separate from the people who comprise it, whether as employees, customers or investors. When you raise taxes on a corporation, you are not raising taxes on some abstract entity that has no connection to real people; the burden of the higher tax on the corporation is borne by individuals in all of those groups, and possibly more.

Romney’s point has provided an effective campaign sound bite for the president, but that just demonstrates the economic illiteracy of our political discourse. The belief that one can somehow tax a corporation without the costs being shouldered by individual Americans is the worst sort of wishful thinking.

Until we face the reality of Romney’s statement that corporations really are people, we will continue to run the risk of cannibalizing our economy by increasing what is already the world’s highest corporate tax rate.

Steven G. Horwitz is the Charles A. Dana Professor and Chair in the Department of Economics at St. Lawrence University in Canton, N.Y.