Are Corporations People?

Release Date
May 7, 2012

Topic

Democracy and Voting
Description

Are corporations people, or are they something else? Corporations are made up of people – including employees, shareholders, and executives. So, are corporations distinct from the people that comprise them? Economics professor Steven Horwitz addresses this question.
Today, many people say we should raise the corporate income tax as a way to tax the rich, or the so-called “1%”. But according to Professor Horwitz, taxes on corporations don’t just tax rich executives, but also average workers and consumers.
So who ends up paying when corporate taxes are raised?

  • Workers pay in the form of lower wages
  • Consumers pay in the form of higher prices
  • Americans saving for retirement pay in the form of lower stock prices and a less valuable retirement portfolio

Professor Horwitz shows that a tax on corporations is not the equivalent of a tax on the wealthy; instead individual people will pay these taxes, regardless of wealth. Working people bear the costs of the corporate income tax.

Desert Island Game (game, beginner): Can you learn something about trade and cooperation by being marooned on a desert island?
Trade Ruler (game, advanced): As the Supreme Ruler of an island, you want the country to prosper. By engaging in international trade, you can achieve this goal.

Are Corporations People?
Are corporations people? This question is actually two different questions. One question is, are corporation’s legally people? The second question, however, is are corporations economically distinct from the people that comprise them? And it’s that question that I want to address. And that question’s particularly important today, when a lot of people are saying we should be raising corporate income taxes as a way to tax the rich and to help address our deficit and debt problems. Well, as it turns out, if we tax corporations we’re not just taxing the rich. We’re taxing everybody. Taxing corporations means taxing all of the people who comprise corporations.
Whenever we do social scientific analysis we always are talking about the choices of individuals. We frequently say things like Walmart lowered its prices today or the government bought more military equipment today. But when we say those things, we really don’t mean Walmart as a whole or the government as a whole. Those institutions can’t act. What’s really happening is that individuals within those institutions—executives or managers at Walmart, bureaucrats within the government—have made a decision to lower prices or to buy more equipment. Abstract entities like Walmart or the government don’t choose; only people choose. And that’s no less true when we talk about corporations and the corporate income tax.
There’s over 50 years of economic research on who bears the burden of taxation. Consider, for example, the gasoline tax. It’s true that gas stations and oil companies write the actual check to the government, but who bears the burden of that taxation? One group of people is you and I as consumers of gasoline. You and I pay that tax in the form of higher prices at the pump as the owners pass along some of that tax to us. Employer payroll taxes work the same way. It’s the employer that writes the check to the government, but part of that tax is paid by workers in the form of wages that are lower than they would otherwise be.
The same is true of the corporate income tax. The biggest burden of that tax falls upon workers, who see lower wages. In addition, you and I bear the burden of higher corporate income taxes as corporations raise the prices of their products to help pay that tax. And finally, higher corporate income taxes tend to reduce stock prices; as a result the value of people’s retirement funds fall as well. So yes, corporations are indeed comprised of people in the sense that it is individuals who ultimately bear the burden of increased corporate taxation. There is an ongoing debate about who bears that burden and how much. But anyone who thinks that taxing corporations means taxing the rich is fooling themselves. It’s us, actual people, who bear the burden of corporate taxation, not the abstract entity called the corporation. And that’s true whether or not corporations are legally people.