November 30, 2017

Breakingviews: US Doesnt Even Have a Corporate Tax Problem

by Breakingviews

Company bosses and regular people alike prefer lower taxes. Republicans are looking to slash the levy for businesses and, at least temporarily, for individuals. The move may give a late-cycle boost to the economy but add to America’s deficit and debt. On one set of official data, corporate tax cuts turn out to be a solution in search of a problem.

Two years ago, Breakingviews predicted that corporate profit was under threat globally. Companies were already grabbing a large share of national income in the United States, global growth was slowing, technological disruption was coming and – to cap all that – governments would increasingly squeeze more tax out of corporate citizens.

Pretty much all of that turned out to be wrong, especially for U.S. enterprises. Global expansion has found a following wind and the election of President Donald Trump made lower taxes the safer bet. Buoyant stock markets demonstrate investors’ optimism about future earnings. The hope of tax reductions is only one ingredient.

American companies’ combined pre-tax profit, as computed by the Bureau of Economic Analysis, did edge down in 2015 and 2016. But it’s on the way up again in 2017, and as of the third quarter it was running at a healthy 13 percent of national income. That compares with a 50-year average of 11 percent and a high around 14 percent.

Meanwhile, taxes on corporate income, per the BEA, have been in long-term relative decline. They accounted for 40 percent of pre-tax profit as the 1970s began, but in the 2010s they have not exceeded 25 percent. The figure was 22 percent in the third quarter. In short, the burden has been shrinking for decades.

The headline U.S. federal plus state levy on company profit, around 39 percent, is at the top end for developed economies. The average effective rate after deductions and the like is much lower, though, and closer to other jurisdictions, according to analyses by, for example, the Congressional Budget Office and the U.S. Treasury. Such studies raise the question of whether the bigger issues with the U.S. system are its distortions and complexity.

Meanwhile, stocks are rising and the median chief executive’s total pay went up 6 percent in 2016 to $11 million, the biggest increase since 2013, based on Equilar’s sample of 500 big U.S. companies. There’s a hefty irony in cutting taxes on corporations when, in a historical context, profit is already plentiful and Uncle Sam’s tax take is low.

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