Only People Have Money

A key to economic understanding is the concept that only people have money.  Other entities pass around the money and may hold it for a while, but when you “follow the money,” as the expression goes, it always eventually comes back to individual wallets and bank accounts.

Thomas Piketty, a well-respected French economist, professor and author of several books on income inequality, made the point clearly in a 2009 essay.  He wrote, “Let’s also recall that no taxes are paid by businesses: ultimately, every euro of tax is always paid by households…there is unfortunately nobody except physical, flesh and blood people who can pay taxes.”

He goes on to say, “Inevitably, firms pass on everything they pay to their workers (by reducing their wages), or to their shareholders (by reducing dividends or accumulating less capital in their name) or to consumers (by raising prices).”  Higher (or lower) corporate taxes means one or more of these entities is going to be affected.

In fact, this economic principle is not limited to taxes.  Any action that affects every company in the US or all companies in a particular industry – whether it be regulations, union bargaining, tariffs, or external events such as weather – feeds back to the end consumer.  This is true because when a cost affects every company, it takes competition out of the equation.  In this case each company can pass along those costs directly without fear of falling behind.  

It works in both directions: companies pass along costs to the three categories of people but their revenue also comes from people.  After they make sales and pay expenses, they must decide how much of the difference to reinvest in the business, making shareholders happy; how much to lower the price, hoping to get more customers and grow the business; or how much to increase wages, hoping to attract and retain the best workers.

So when CBS reports, as they did early last month, that Apple, Amazon and Google made a load of money in the last quarter of 2017, we must understand that those billions came from our wallets. And no one forced anyone to buy an iPhone or order items on line.  Facebook had similar positive results, but they forced no one to log in or click on the ads.  All these companies got their money from individuals (households) by providing goods and services that they valued.  Unlike the case of corporate taxes where every company gets to pass along added costs, all these companies, and any other company that wants to stay in business, must compete every day to provide the best service or product at the best price. When they do, they attract customers. That’s where their money comes from.

Some politicians want you to hate the rich.  But, barring those who inherited their wealth, it was people who made them wealthy by willingly giving them money in return for something of value, either directly (Jeff Bezos at Amazon) or indirectly (Warren Buffett investing in successful companies).

This dynamic works very well unless the government gets involved.  When certain companies are favored due to their relationships rather than their ability to provide the best for the least, their incentive shifts from satisfying customers to influencing politicians.  They no longer compete for our business where we voluntarily trade our money for their products.  Instead they compete for money that was taken from us involuntarily by the government (in taxes) and paid out in grants and subsidies.  It’s easy to see how this can skew the system, replacing an emphasis on added value with efforts to influence politicians.  This shift ends up costing the entire economy in the long run as less efficient companies stay in business through government favors.

Economic understanding helps voters to step back and look objectively at some of the actions and promises of elected officials, sorting through fact and fiction by following the logical path to and from households – wallets and bank accounts.  As a current example, when all the cities and states sue drug companies over the opioid epidemic, the money they (and their lawyers) collect will ultimately be an indirect tax levied on households through higher drug prices just as tobacco lawsuits translated into higher cigarette prices.