When We Tax Corporations, We Rob Them of Their Future
The advantages and gains that are realized today are due to capital that was invested previously.
—Mark Spitznagel, The Dao of Capital
The brothers Charles and Frank Duryea completed the first gasoline-powered American car in Springfield, Massachusetts, on September 20, 1893.1 By 1896 they had sold thirteen of their machines, and only the most wild-eyed optimist would have foreseen that the automobile would be a ubiquitous middle-class good within twenty years.
Thank goodness for the unquenchable drive of entrepreneurs like Henry Ford. In 1876, at the age of thirteen, he saw a crude steam-powered horseless carriage moving itself down the street and was mesmerized. He would say later, “It was the engine which took me into automotive transportation.”2 Sixteen years later, in 1892, Ford produced his first automobile.3 By 1903, he had incorporated the Ford Motor Company. By 1908, he had introduced the Model T to a public that had never imagined owning a car at all. And by 1911, he had prevailed in court over a cartel called the Association of Licensed Automobile Manufacturers, which had first dismissed Ford as an “unreliable upstart” and then tried to block him from producing his Model T.4 Five years later, Ford Motor Company produced 585,000 Model T autos. Ford’s compulsion to perfect his manufacturing processes never let up, and by 1921 his assembly-line system had produced a million vehicles.5 Henry Ford had turned a plaything for the rich into a universal necessity.
In his dazzling book, The Dao of Capital, the investor Mark Spitznagel makes the essential point that “Ford Motor Company would not have prospered had the founder not committed to continuous long-term investment in improvements and roundabout production.”6 Translated, Ford’s reinvestment of his profits in improvements to his manufacturing process made all the difference.
Imagine if today’s U.S. corporate tax rates, which are among the highest in the world, had been in place at the dawn of the twentieth century.7 It may be too much to suggest that none of us would ever have heard of Ford, but it’s reasonable to presume that today’s tax rates would have prevented Henry Ford from producing the Model T in the quantities and at the prices that ushered in the age of the automobile. Investment is how companies increase the quality of their product and improve the way they produce it. Profits make better processes and better products.
Just as the story of the Rolling Stones shows how high personal taxes on the rich hurt middle- and low-income earners, Ford’s story reveals the harm of high corporate taxes. Politicians justify high corporate taxes on the grounds that corporations are big enough to take the hit. But setting aside for a moment the reality that corporations are owned by individuals, we mustn’t ignore what profitable companies do with their profits. To understand this point, let’s return to Henry Ford’s story.
As Spitznagel writes, “When profits [for the Ford Motor Company] swelled, he paid well for labor, creating an uproar when he doubled the basic wage to $5.00 a day, which triggered a virtual stampede of job seekers.”8 The popular myth is that that Ford raised wages so his workers could buy his automobiles, but in fact he was responding to economic necessity.
Spitznagel has found that annual employee turnover within Ford had reached 370 percent in 1913. By “paying workers well, he effectively lowered his costs because higher wages reduced turnover and the need for constant training of new hires.”9 It has been said that capitalism, or the profit motive, makes us compassionate in our actions even if we don’t feel compassionate in our hearts. Ford’s concern with the profits that allowed him continuously to improve his business drove him to pay his workers more than the prevailing wage.
Fortunately for Ford—and for everyone who drives an automobile—he didn’t face the exorbitant tax rates that corporations labor under today. Low corporate taxes allow companies both to reinvest in the known and to experiment with new ideas.
The French Connection won the Academy Award for Best Picture in 1971, made a star of Gene Hackman, turned the little-known documentary filmmaker William Friedkin into an A-list auteur, and introduced audiences to the big-screen excitement of a true high-speed car chase. But this film was almost not made. As Friedkin recalls in his memoir The Friedkin Connection, he and Phil D’Antoni “schlepped The French Connection around for two years. . . . We took it to every studio, and were rejected by all.”10
With no serious bidders on the film, Friedkin eventually signed up for unemployment benefits. The very next day he received a call from an agent who told him that Dick Zanuck, head of Twentieth Century-Fox, had requested a meeting. Friedkin and D’Antoni went to see Zanuck, who told them, “I’ve got a million and a half dollars hidden away in my budget for the rest of the year. I’m on my way out. They’re gonna fire me, but I’ve got a hunch about that French Connection script.”11 The rest, of course, is history.
George Gilder has observed, “It is the leap, not the look, that generates the crucial information.”12 How true. Economic growth is about taking risks, learning from them, and then using the information gleaned from experimentation to inform future economic activity. The extra one and a half million dollars that Twentieth Century Fox had lying around meant that one of the twentieth century’s most important films could be made. Furthermore, the success of The French Connection informed Hollywood’s subsequent endeavors and helped define filmmaking in the 1970s.
Friedkin’s movie is merely the “seen,” to quote the nineteenth-century French political economist Frédéric Bastiat. The “unseen” is the experimentation that never takes place because government is taxing away so much in corporate earnings. Profits are the reward for entrepreneurial creativity. American filmmakers—from Steven Spielberg, to Brad Bird (Pixar), to David Cameron—set the global standard for creativity, but we should never forget the films that are never made. How many exciting ideas never see the light of day because of the corporate taxes shackling the movie industry?
Filmmaking, of course, isn’t the only business hemmed in by high tax rates, and it’s certainly not the most important. Oil remains an essential economic input, yet profitable U.S. oil companies arguably suffer the greedy hand of government the most. ExxonMobil alone paid thirty-one billion in taxes on its profits in 2012, more than any other company in the United States.13
Oil companies have long been a favorite whipping boy of the political class, and it’s politically easy to demand that “Big Oil” pay more of its fair share. But a large part of the energy industry’s tax problem is that it is tied to the place where the oil and gas are. While Google can move its human assets from high-tax California to low-tax Texas, oil companies cannot move Prudhoe Bay from Alaska, with its 9 percent corporate tax rate, to Texas, where corporate profits are not taxed. They can’t move the Bakken Shale out of North Dakota, with its 5.15 percent corporate tax, to South Dakota, where corporate profits once again are not taxed.14 It’s no surprise, then, that the list of the ten highest-taxed U.S. businesses includes three oil companies.15
Of even greater importance is what the world economy loses when an oil giant like ExxonMobil hands over so much precious capital to the federal government every year. ExxonMobil’s profits and market valuation are certain signs that it is delivering enormous value to its shareholders and customers. Its executives have made it the most valuable of the numerous public oil companies in the United States, demonstrating unexcelled skill in deploying the capital allocated to them. Does anyone believe that John Boehner, Nancy Pelosi, Mitch McConnell, and Harry Reid are better allocators of the billions of dollars that ExxonMobil annually relinquishes to the government?
In spite of the predations of rapacious politicians, the oil industry is enjoying a renaissance of sorts. But we mustn’t forget Bastiat’s “unseen.” How much better off would corporations in the energy industry—and by extension their shareholders—be without the self-righteous fleecing to which they must submit?
Is it possible that we’ve already forgotten what happened in 2008, when Congress used taxpayer dollars to bail out corporations that could no longer support themselves? The bailouts properly offended the electorate. This raises a question that goes to the heart of the corporate tax question: Do we prefer businesses that can suceed without taxpayer assistance, or would we like to continue saving the weak? The question answers itself.
Just as successful companies should be allowed to succeed, unsuccessful companies should be allowed to fail. The great Austrian School economist Ludwig von Mises wrote that the entrepreneur who fails to use his capital to the “best possible satisfaction of consumers” is “relegated to a place in which his ineptitude no longer hurts people’s well-being.”16 Mises meant that businesses succeed because they fill an unmet need. If they fail, it is often because they have failed the consumer. In that case, bankruptcy is an economic good, because it relieves those the market has left for dead of any further capital to destroy.
The influential Austrian had a point. Inept corporations weaken society not only by failing to serve customers and shareholders but also by dissipating precious capital in the process. Politicians should keep this principle in mind the next time they are tempted to bail out failing businesses, even very big ones. The successful businesses that serve our myriad needs and desires while employing many of us should not labor under oppressive taxation. Just the same, government should get out of the way when companies fail because they do not meet our needs.