THE FUTURE OF FINANCE BLOG

Guest Post: Romney on Where Corporate Earnings Go: An Important Statement Misheard

August 15, 2011

Progressives have roasted Republican presidential candidate Mitt Romney for telling Iowa State Fair goers that corporations were people.  Rants about ‘corporate personhood’ popped up everywhere.

But ‘corporate personhood’ is a snare for us because, properly used and understood, it’s a proven, valuable tool for many types of organization.  Worse, our canned cant leaves unrebutted what Romney – and a lot of other conservatives – are actually saying.

Here is how Eric Plumer on Ezra Kline’s Washington Post blog transcribed the potent part of the Romney’s remarks:

ROMNEY: Corporations are people, my friend. We can raise taxes on —

AUDIENCE MEMBER: No, they’re not!

ROMNEY: Of course they are. Everything corporations earn also goes to people.

AUDIENCE: [laughs]

ROMNEY: Where do you think it goes?

AUDIENCE MEMBER: It goes into their pockets!

ROMNEY: Whose pockets? Whose pockets? People’s pockets! Human beings, my friend. So number one, you can raise taxes. That’s not the approach that I would take.

The audience member didn’t challenge Romney on his assertion that everything corporations earn goes to people.  He wanted to argue about who it went to.  Progressives – myself included – have to develop a simple way to challenge Romney’s untrue assertion because instinctively ordinary people believe it.

Romney turned a relatively modest fortune into a much larger one – Maureen Dowd reckons his net worth at between $190 and $250 million – by buying undervalued corporations, converting that excess into cash for the his firm’s partners and investors (pensions, high net-worth individuals, institutional investors, etc.), and then reselling the now-stripped company.  That’s what private equity firms, like Romney’s unquestionably successful Bain Capital, do. [1]

Simply put, Romney’s business was to turn the difference between a corporation’s market value and real value into cash and distribute it to some ’human beings’ and a lot of corporate people – just not those whose efforts and investments created the excess value he harvested.

But how did that value get into the corporation and stay there so Romney and Bain Capital could realize it?

What distinguishes corporations, historically, from other forms of business is their ability to accumulate wealth without distributing it.  Consider a definition of ‘corporation’ written 190 years ago by US Supreme Court Chief Justice John Marshall in the vitally important Dartmouth College Case :

A corporation is an artificial being invisible, intangible, and existing only in contemplation of the law.  Being the mere creature of the law, it possesses only those properties which the charter of its creation confers on it….  Among the most important are immortality, and, if the expression be allowed, individuality; properties by which a perpetual succession of many persons are considered the same, and may act as a single individual.  They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity, of perpetual conveyances for the purposes of transmitting it from hand to hand…. [2]

In short, what Romney said – ‘Everything corporations earn also goes to people’ – has always been 180 degrees from the essence of the corporate form.

One adjective never applied to Mitt Romney is ‘stupid’.  So when he says something this wrong, as he did at the Iowa State Fair, either he was overcome by bovine flatulence or he had a purpose in what he said.

In one regard, Romney affirmed a central argument against taxing corporate income:  it amounts to double taxation because shareholders later will pay tax on the dividends, if any, they get and/or on the gain, if any, they get on selling the shares.  But he’s also defending something far more important to him and the corporations themselves.

Corporations are stores of value, accumulations of assets – wealth.  Control of that value confers power and compensation.  Citizens United and corporate free speech just acknowledge reality:  money = speech = power.  And as Jack Welsh’s duly conferred retirement benefits from General Electric proved, executives have no need to steal.

New taxes and elimination of tax dodges, such as off shoring profits, reduce that power and, not coincidentally, the justification for compensation.  Put differently, taxing increases the leverage government – the polity – has on their creations – corporations.

So Romney was not the only one wrong in the Ames dialogue.  Only in a modest way do corporate earnings land in ‘People’s pockets! Human beings, my friend.’  But in a real sense they never reach the audience’s pockets.

The likes of Warren Buffett and William Gates, Sr., appreciate that that fact is the greatest threat to the American – and world – social system.

Notes:

1.  The business careers of Mitt Romney and George W. Bush could not be more different both in essence and outcome.  Romney suffers when their careers aren’t aligned and compared because both men had successful fathers and came from relative wealth.  The assumption is they succeeded the same way which isn’t true.

2.  Dartmouth College v. Woodward, 4 Wheaton 518 (1819) as quoted in Arthur Selwyn Miller, The Modern Corporate State (Westport, CT.: Greenwood Press 1976), pp. 20-21.

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