Economics

Mega-Corporations Are Not Your Enemy

In modern political discourse, “corporation” is almost a slur.

In 2021 Vermont US Sen. Bernie Sanders, responding to criticisms of his tax proposal, released a video titled “Yeah, we’re going to TAX BILLIONAIRES & CORPORATIONS” in which he assures us that the new taxes would be taken exclusively from large corporations and their wealthy owners, as though (even if true) that would automatically make it okay. It seems to imply that corporate income is so obviously unjustified that we needn’t have any qualms with just taking it.

On the other side, in opposition to a different tax hike proposal, Sen. Rand Paul was quick to point out that it would hurt small businesses. Why small business, specifically? Aren’t large corporations also entitled to keep what they’ve earned?

Perhaps Paul is just focusing on victims that people have sympathy for, but either way, both he and Sanders (and most other politicians) arrange their rhetoric around the broadly-held view that large corporations are fundamentally corrupt organizations, flooded with riches they neither earned nor deserve to keep.

This view is unwarranted, however. Far from being hoarders of ill-gotten gains, successful corporations are an incalculable boon for humanity.

The Simple Economic Argument

From a basic economics standpoint, the utility of large corporations is obvious: trade is mutually beneficial, and large corporations engage in a lot of trade.

When you buy a burger from McDonald’s, you must value the burger more than the money, or you wouldn’t have bought it. The owners and employees of McDonald’s must value the money more than the burger, or they wouldn’t have sold it. You all value what you have after the exchange more than what you had before, so total wealth has increased.

But couldn’t the employees produce the same goods without the giant corporate structure?

Simply put, no.

If the inexperienced young employees that McDonald’s tends to hire to cook their burgers started a burger joint on their own, you probably wouldn’t go there. Corporations become successful by providing both capital and a management structure that allows products to be produced at a price, quality, and consistency that more than makes up for the cost of running that structure.

The employees, just like the consumers, must be getting more by engaging with the corporation than they could get elsewhere, otherwise they would not engage in the exchange. Again, after the exchange, total wealth has increased.

Essentially, the wealthier a corporation is, the more wealth it must have created for others in return. This argument, while sound, will probably not convince a skeptic. Critics of large corporations have objections which they believe rebut or outweigh our simple economic argument.

The Subsidy Objection

Perhaps our simple economic argument doesn’t apply to large corporations because often their wealth comes not from voluntary exchange, but from government handouts. Conservatives, progressives and libertarians all love to rail against corporate welfare, and not without justification.

Corporations really do receive subsidies, and subsidy income really cannot be justified by our simple economic argument. After all, taxing someone and giving that money to a corporation is not voluntary exchange.

Empirically however, the vast majority of corporate wealth does not come from subsidies.

The five largest US corporations by market cap are Apple, Microsoft, Google, Amazon and Tesla. Last year, Apple’s revenue was $366 billion, Microsoft’s was $168 billion, Google’s was $258 Billion, Amazon’s was $470 billion and Tesla’s was $54 billion.

The obvious way to get an idea of how much of that revenue is due to government handouts would be to compare their 2021 revenue to their 2021 subsidies. However, according to the subsidy tracker on goodjobsfirst.org, not all of these corporations received subsidies in 2021, so we will need to take a longer view.

Totaling the disclosed subsidies for 2011-2021, Apple got $1,414,030,662, Microsoft got $670,043,203, Google got $404,558,866, Amazon got $3,571,589,999 and Tesla got $3,586,599,901. Simple division reveals that for most of these corporations, an entire decade’s worth of subsidies still amounts to less than a few days’ revenue. Even the relatively well-subsidized Tesla earns more every few weeks by selling cars than it received in subsidies in those ten years combined.

In fact, this still massively overstates corporate subsidization. Why? Because most of those “subsidies” are tax-breaks. An actual subsidy is a source of income which doesn’t require the company to provide anything to anyone. A tax-break is when the government takes less of the very profits which incentivize production in the first place.

To be clear, if we care about free markets, every government subsidy is worth opposing. But empirically, the income that large corporations receive from subsidies—even dubiously including tax-breaks—is negligible compared to the income they receive from providing goods and services for people to enjoy.

The ‘Fair Share’ Objection

Another common refrain is that corporations don’t pay “their fair share” of taxes. Pew Research found that 81 percent of Americans are bothered at least “some” by their perception that “some corporations don’t pay their fair share.”

Looking at the numbers, this might initially seem valid. Last year, corporate income tax accounted for 9 percent of all federal tax revenue, as opposed to 51 percent from individual income tax. However, there are two issues with this picture.

First, corporations are made up of people who already pay taxes. Everyone from the entry-level employees to the board of directors pays taxes on the income they receive from the corporation. “Corporate taxes” are really paid by everyone involved with a corporation, on top of their normal income tax.

Some argue that the wealthy owners of corporations avoid taxes themselves, but this is simply false. A Heritage Foundation investigation found that the U.S. tax system is already highly progressive, with the top 5 percent paying 60 percent of the taxes despite earning only 37 percent of the income.

The other issue is that it’s unclear how corporations paying taxes is even a good thing. Corporations survive on their ability to allocate resources better than competitors. Governments have no such requirement.

Take schools, for example. If a private school doesn’t provide a good service, I can send my child elsewhere, and they won’t get my money. If a government school doesn’t provide a good service, they’ll still get my money through taxes—even if I send my child to another school.

The same logic applies to all government services. Corporate taxation is the transfer of resources from an organization with good incentive to use them wisely to one with poor incentive to do so.

Stop The Hate

Corporations are easy political targets. They are organizations of people, rather than individuals, so they are easy to dehumanize. The largest of them are, by definition, wealthy, so they’re hard to feel sorry for.

But upon reflection, it’s hard to find a more socially beneficial class of organizations anywhere. Rather than being seen as acceptable targets of hatred and sources of guilt-free plunder, large corporations should be seen as inspiring achievements for human welfare, and their creators should be admired as the heroes of civilization that they are.

The post Mega-Corporations Are Not Your Enemy was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.

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