Abolish the Corporation Tax and All Other Taxes on Investment

Corporate taxes and other taxes on investment constitute double and sometimes triple taxation. That's more unjust than taxation of labor or consumption. Businesses can't pay taxes; only people can. But who pays business taxes need bear no relation to whom the lawmakers targeted. The corporate tax has been known to reduce wages and dividends (to retirees of moderate wealth) and indirectly to increase prices to consumers. How's that help anyone? Capital accumulation is what raises labor productivity and wages. Thus, taxes on capital steal from workers, among others. As economist Roy Cordato writes:

Corporate taxes are hidden and fraudulent. The people who pay them do not know they pay them, and thus such taxes help mask the actual cost of government. If it is true that companies are finding ways to avoid these taxes and less revenue is being generated, then we should cheer those companies on. Ultimately corporate taxes should be abolished. Lovers of big government have no better friend than a tax that everyone thinks someone else pays.

Bryan Caplan and Me

 I sat down recently for a chat with my old friend Bryan Caplan.

TGIF: "Corporate" Is Not a Four-Letter Word

I rise today to protest the widespread and malicious use of the adjective corporate as a synonym for evil, corrupt, exploitative, or any number of other pejoratives. As a descriptor, corporate merely says that an association that makes or sells goods for profit is publicly registered as a corporation. (Nonprofits can be corporations too.) This distinguishes the association from sole proprietorships and partnerships. That in turn means the participants in the association have agreed contractually to do business and raise capital in particular ways. Its ownership shares are readily tradeable; it may pay dividends to shareholders; it has a board of directors that hires officers and managers who may not be shareholders, etc.

That's it! That this form of free association should be so despised by "left" and "right" is rooted in misunderstanding, illiberalism, or both.

Incorporation carries no privileges or special obligations under the law. It is a free arrangement arising from a contract and the efficiency-enhancing division of labor between owners and managers. As an association of individuals who have the rights to life, liberty, and lawfully acquired property, the corporation is properly subject to the same laws as anyone else, no more or less. Corporations are (groups of) people. It's as simple as that. (Thus the decision in Citizens United v. FEC was a no-brainer.)

TGIF: Are Bosses like Rulers?

What does the libertarian philosophy have to say about business management as an institution? Is it analogous to the state or something entirely different? Since we libertarians generally dislike seeing people being bossed around, whether by the state or anyone else, we may be tempted, as I've certainly been, to think that a free and just society would spontaneously dispense with the traditional employer-employee relationship. After all, libertarians have good reasons to at least be suspicious of all hierarchies and subordination, right?

So freedom would achieve its glorious pinnacle through flat bossless worker-owned co-ops, small partnerships, single-proprietorships, and peer-to-peer arrangements that lack even Uber's central ownership.

But maybe not.

The prediction that managerial specialists are due for extinction, however, looks more like wishful thinking in light of solid economic theory and empirical evidence, write economists Peter G. Klein and Nicolai J. Foss in their new book, Why Managers Matter: The Perils of the Bossless Economy. (This is not intended as a formal book review. Listen to Klein's conversation with Keith Knight of Don't Tread on Anyone.)

Klein and Foss's thesis grabbed my attention because, as I've experienced firsthand, drawing an analogy between the state and the traditional firm is seductive. On the other hand, I've known and respected Klein, an economist of the Austrian school who teaches at Baylor University's Hankamer School of Business, for many years. I take him seriously. (Foss teaches at the Copenhagen Business Schools in Denmark.)

The case against the traditional firm has this touch of plausibility: because government interventions in mixed economies can make quitting a job artificially costly, people might feel trapped in bad work situations. To the extent that the government deliberately or inadvertently creates obstacles to starting businesses or relocating (through licensing,  zoning, and more), or through a tax system that ties medical insurance to one's job -- to that extent, the government can in effect block employees from leaving bad workplaces or reduce their bargaining power. Such interventions provide a politically derived advantage to employers over actual and prospective employees that could not be achieved in the market.

But employers can create these impediments. Politicians and bureaucrats can and do.

For libertarians, the obvious remedy for politically bestowed advantages on employers is freedom, specifically, the freedom to compete, to start businesses, to move where the terms are better, etc. Ready options increase employee bargaining power. (Adam Smith in The Wealth of Nations decried the English laws that barred workers from moving to other areas in search of better pay.) Competition is the universal solvent.

The case against government policies that favor employers (again, not necessarily by design) should not facilely be extended to managerial hierarchy or traditional employment per se. Socialists haven't been the only ones to equate employment with servitude. Even the great classical liberal philosopher Herbert Spencer compared it to slavery. (Ironically, the pre-Civil War South's most eloquent defenders of chattel slavery denounced the wage slavery of the free labor market.) However, in a free market and even in a mixed economy like ours, the problem isn't distinct ownership and management. It's politicians and bureaucrats.

This is a big subject, and I'm certainly no expert, so I can only scratch the surface here. But Klein and Foss specialize in the economics of industrial organization and are an important reality check on those who think managerial hierarchy is morally objectionable and economically superfluous or worse.

Morally, of course, as long as neither side of a transaction, including the employer-employee relationship, uses force against the other, the transaction passes muster. It is irrelevant that one side can be said to have a "greater need" than the other for that relationship at that time. It is no employer's fault that people need to earn a living. One might even praise the employer for providing the means to do so. But let's remember that no firm is founded to provide jobs. Firms exist to make money for their owners by producing something of value for others. To do that they will typically hire people. Like other market transactions, all these exchanges produce mutual gains.

People start businesses with plans to produce something specific. Until they decide that a new objective is needed, the owner (or owners) will want to motivate and guide the staff to carry out the mission. Exactly who decides how the mission is carried out is a management's judgment call that depends on many factors. That's what management is about, and managing is real work, as the early classical liberals understood. The owner of an Indian restaurant is unlikely to hire chefs who insist on the autonomy to add other kinds of dishes to the menu. It would be wrong to think that those chefs are oppressed or stripped of their dignity.

Owners or their managerial agents, then, select the company's ends. However, the authors say, in the new information economy, it makes more sense than ever to leave the means to frontline employees. "We agree that the new environment suggests the need for a redefinition of the traditional managerial role." But they add: "Despite all the changes that have occurred, there is a strong need for someone to define the framework. In the knowledge economy, the main task for top management is to define and implement the rules of the game." Managers are also important for coordinating different divisions of a company that depend on each other.

Nuance, then, is the order of the day. Klein and Foss clearly are not dogmatically pro-hierarchy: "Indeed, some companies have excessive corporate fat: layers could often be cut, and empowering employees might increase productivity."

But the authors note that although the new technologies have revolutionized business, "the laws of economics are still the laws of economics, human nature hasn't changed, and the basic problem of business -- how to assemble, organize, and motivate people and resources to produce the goods and services consumers want  -- is the same as it ever was."

Any firm or noncommercial organization, for that matter, requires a focus on both the forest and the trees, the long and short term. Why would we be surprised that different people have different skills and different preferences in this regard? Skills, of course, are not evenly distributed throughout a population. A division of labor, knowledge, and inclinations is to be expected. Many will want to concentrate on a specific job, without having to think about management, long-term planning, and such. Lots of people dislike sitting through meetings.

Moreover, people differ in their preferences for risk-taking. Some prefer a regular paycheck in return for less overall responsibility.

The upshot is that human diversity makes noncoercive hierarchies perfectly understandable, inevitable, and beneficent as long as the market is free. That in no way means that bosses can't be stupid, obnoxious, or abusive. Of course they can and are. But if they have to compete without government privilege, abuse and stupidity won't survive because profits will go to the better-run firms, which will attract the best employees. 

In interviews (as in his and Foss's book), Klein emphasizes that one size surely does not fit all companies. As a Hayekian, he understands that nonmanagement workers possess local and tacit knowledge that managers don't -- and that good managers will want their employees to capitalize on that knowledge and reward them for doing so. "[T]here are many benefits to decentralization, as well as costs, and these vary widely with context and circumstance," Klein and Foss write.

Klein and Foss intend their book to correct the impression given by many current writers on management philosophy that hypes the spread of nonhierarchical companies and predicts a future marked by this new way of doing business. It's not true, Klein and Foss respond: "... echoing Mark Twain ... the death of hierarchy has been greatly exaggerated and ... its bad reputation is largely undeserved."

Their point is not simply that some degree hierarchy is more efficient than none at all, but that bosslessness poses perils to businesses, such as discoordination and -- perhaps counterintuitively -- lack of flexibility.

As you can tell, this is a rich thesis. I'll close with a couple more quotes:

Writers [who favor bossless firms] ... are fiercely critical of traditional hierarchy, but we think they exaggerate its problems and neglect many benefits.... The near-bossless companies -- and there aren't many of them -- with their self-managing teams, empowered knowledge workers, and ultra-flat organizations are not generally or demonstrably better than traditionally organized ones. Bosses matter not just as figureheads but as designers, organizers, encouragers, and enforcers....

[I]f you look more closely at ... ostensibly bossless companies, you see that they do have formal [or informal] bosses.... Right away, this suggests that perhaps the whole bossless company narrative is a bit of a head-fake -- a way to draw attention to the charismatic, influential leaders who create and promote flat structures..... Contrary to popular opinion, the world is not becoming dominated by flatter, even bossless, network organizations.

The market is an efficient decentralized information-generating process. Through private property, voluntary exchange, free enterprise, and the price system, we learn things that we can't learn in other ways. This is as true for the best management methods as it is for the many other things we look to the market for. Government should never impede worker-owned enterprises, but it shouldn't help them either. Freedom is for all. 

Related reading: "Free Men for Better Job Performance" by C. L. Dickenson, published by the Institute for Humane Studies in 1966. It is posted here and here.

TGIF: Free Exchange Is Win-Win

With the possible exception of the political class and its cronies, most of us would be healthier, wealthier, happier, and freer if the public knew how to engage in "the economic way of thinking." The late Paul Heyne, who wrote a popular textbook by that name (now in its 13th edition thanks to Peter Boettke and David Prychitko), summarized the economic way of thinking by writing, "All social phenomena emerge from the choices of individuals in response to expected benefits and costs to themselves."

I think of Heyne's title whenever I encounter an example of failing to understand this. Unfortunately, our society is rife with examples and resulting bad government policies, which tells you a lot about why we suffer periodic hardships like the current inflation. The lockdowns during the COVID-19 pandemic were a spectacularly tragic example of the failure to engage in the economic way of thinking.

Other instances of that failure are so thoughtless as to be ludicrous. Take the wealthy business owner who donates a large sum of money to a worthy cause. The fallacy occurs when the donor or someone else inevitably says that the charitable act was motivated by a wish to "give something back," presumably to society or the community.

What's wrong here? It suggests that the donor wants to show gratitude for his fortune by reciprocating. But that makes no sense because the donor's wealth was not the result of people handing over money as a favor and getting nothing in return. Those people were customers, not donors. They bought something they wanted and must have liked the terms of exchange. So there is nothing to pay back. (I have in mind only people operating according to just-market principles: no force, fraud, or favors coercively provided by politicians.)

In the marketplace, profits come from voluntary exchange, which requires that buyers and sellers freely choose to transact business. Why would they do that? They do it because each party expects to benefit -- to be made better off -- by giving up something they own for something that they would rather own. This is clear with barter, but it's equally true when one party trades money. Money, a medium of exchange, expands the opportunity for exchange by enabling people to get what they want even when they don't have the particular items that their available trading partners want.

When Smith trades a sum of money to Jones to acquire shoes, Smith demonstrates that he prefers those shoes to anything else he might have feasibly used the money for, including holding on to it. Jones demonstrates the opposite preference.

Unfortunately, since they are fallible, Smith or Jones (or both) might realize later that he made a mistake. That's life, but it does not change the fact that at the moment of exchange, both sides expected to gain. If they are right, they have a happy win-win, or positive-sum, situation. Both sides profit, not just the one who obtains money because both come out ahead. (The competitive quest for profit has brought us liberal return policies, so the fallibility problem long ago became much less severe. John Stossel likes to point out that at the supermarket, both checkout clerks and customers typically thank each other.)

Free exchange produces mutual gain. If we could quantify the gain (we can't), we would say that after the exchange, the two people have more total value between them than they had before the exchange. This is remarkable, considering no new stuff was created by the transaction. Possession of the product and the money simply changed hands.

To put it qualitatively, we can say that through the exchange, both parties climbed higher on their respective value scales, giving up a subjectively lower-ranking value for a subjectively higher-ranking one. (What counts is how the parties evaluate things.) For this to occur, we need first, two parties with different preferences and, second, freedom, including property rights. Before you can justly trade something, you must own it.

In light of the two-way gain through free exchange, the wealthy seller has no reason to "pay back." He is successful because he provides value to his customers, who are happy to exchange their money. 

It's too bad that people who earn fortunes justly are made to feel guilty about their success. (Ayn Rand and Ludwig von Mises did their best to teach honest producers they had nothing to be ashamed of.) We consumers never feel guilty about the profits we reap. Why should the sellers?

Governmental Logic

Mitch McConnell, the Republican Senate leader, had this to say in connection with the auto bailout:

We will not let the taxpayers spend their hard-earned money on ailing carmakers unless these companies are forced to reform their bad habits -- either inside or outside bankruptcy.

So the way McConnell sees it, we taxpayers want to spend our hard-earned money to save the Big Three, but he is going to stop us -- for our own good -- if the companies aren't compelled to reform themselves.

I guess that's Republican paternalism. As a libertarian, I object. If I want to spend my tax money on GM, Chrysler, and Ford, I'm going to do it whether some presumptuous senator from Kentucky wants me to or not. This is a free country!

Cross-posted at Anthing Peaceful.

No Hotbed of Laissez-Faire for Labor

From the free-market economic historian Jonathan R. T. Hughes's The Governmental Habit Redux (37):

In addition to controls over wages, entry into trades, apprenticeships, indentured servitude, and black slavery, the labor contract was also subject to nonmarket controls over business enterprise in general. . . . [T]he colonial world was no hotbed of laissez-faire for labor. It was a world well described by A. E. Smith not as a democratic arcadia, but a place where men with money thrived by making the poor work. A tradition was established: "It is a familiar story that mankind, when confronted in America with a vast and trackless wilderness . . . threw off its ancient shackles of cast and privilege and set forth upon the road to freedom. Among the social institutions found most useful in the course of this march were those of African slavery and white servitude."

The reference is to Abbott Emerson Smith's Colonists in Bondage: White Servitude and Convict Labor in America, 1607-1776, 1947.

The Rent-Seeking Habit

Wal-Mart's CEO and his chief nemesis, the head of the Service Employees International Union, have joined forces. They recently appeared together at a news conference to endorse "universal health care," sugar-words for medicine by coercive bureaucracy. No, this is not another article about why a government-based medical system is a terrible idea. This is an article about a business leader looking to the state for a bailout.

Read the rest of this week's TGIF column, "The Rent-Seeking Habit," at the Foundation for Economic Education website.

Cross-posted at Liberty & Power.