On Thursday, Mitt Romney was quoted as saying that "Corporations are people." While the DNC has chosen to make fun of the statement, it is actually quite insightful. In fact, the insight is one that I hope Congress members keep in mind as they attack the deficit over the next few months. No, I don't mean they should keep in mind that corporations are people and should not be taxed. I mean that they need to think past the obvious, and realize the implications of their actions and decisions. Our government has a long history of missing the "unintended" consequences -- we can't afford that now!
Can't imagine the unintended consequences of taxing those big evil corporations? Oh, good. I love a challenge!
Romney's comment came in response to the suggestion that the government should raise taxes on businesses instead of on individuals. Interestingly, the same set of polling also indicated that the majority of Americans think taxes should be raised on the "rich" to close the deficit. (In a related story, people think power plants should be built in another city, government services should be cut in a neighboring state, and "those people" are causing all the problems in this country. Aren't polls enlightening?)
So, most Americans think the government should raise taxes on corporations. What is a few dollars away from these multi-billion dollar companies, right? What a great question! Let's imagine that YOU are the CEO of Giant MegaCorp. Your job, of course, is to ensure Giant MegaCorp makes money. And you have been successful. Congratulations! Suddenly, Congress decides to raise corporate taxes (because they can). Now, you aren't making as much money as a company, and the Chairman keeps calling to ask how you are going to fix it. What will you do?
Option 1 - raise prices. No problem, right? The government says you have to pay them 25 cents more for each Super Deluxe Thing-a-ma-bob you sell. Simply raise the selling price by 25 cents. Voila! You are making the same profit as before. Great job! Unfortunately, your customers aren't feeling the same way. The average American now has to pay more to buy the Super Deluxe Thing-a-ma-bob. And since every other CEO thinks you are smart (naturally), and followed your example, the price of everything at the store just increased. The net result is that the "corporate" tax increase gets passed on and "people" pay the tax. So much for protecting the little guy.
Option 2 - reduce costs. You tried raising prices, and the "people" got mad - so back to the drawing board. Simple enough, reduce costs instead. You just have to make the Super Deluxe Thing-a-ma-bob for 25 cents less. Unfortunately, you can't lower the cost you pay for parts, because the government raised taxes on your parts supplier. And utilities and shipping rates are all going up too. The only way to reduce the cost is to lower your payroll. And to be clear, lowering payroll means decreasing wages, or eliminating benefits, or laying off employees. Again, those other CEOs will copy your brilliance. Suddenly unemployment is over 10% again, more people than ever are on government support (increasing the deficit), and "people" are paying the price of those new taxes.
Option 3 - grin and bear it. Enough with the greedy CEO act! Stop trying to protect your profits, and just make less money. You decide to take the high road and protect the "little guy". As a result, your profits go down, which drives down your stock price. As other CEOs follow your bold action, their stock prices go down, too. Suddenly, the stock market is down 20-30%. Don't forget that most mutual funds, IRA's, pensions, and 401k accounts are invested in the stock market. You got it; the "people" who were saving for retirement just saw their nest eggs crack. In addition, the drop kills consumer confidence, and plays havoc with the interest rates on bonds, loans, mortgages, and bank accounts. Not only does the stock market drop hurt the "people" - it also increases reliance on Social Security and other government programs, driving up government spending.
Sadly, there is no good answer for you as CEO of Giant MegaCorp. Anything you do will cause "people" to absorb the tax increase. (I guess you could resign. But then you are unemployed, and a new CEO faces the same decision. But if you do resign, please recommend me as the replacement!)
I have my own beliefs about whether raising taxes on corporations is a good idea. (It isn't, but that is a debate for another day.) Raising taxes on corporations to "pay their fair share" and "protect the lower class" however is a huge mistake. It shows a lack of understanding, and sets us up for painful, unintended consequences. The "Super Committee" in Congress needs to take a lesson from Mitt, because "corporations ARE people, too!"
No comments:
New comments are not allowed.