Corporate profits are at their highest level for at least 85 years. Employee compensation is at its lowest for 65 years.
The Commerce Department estimated last week that companies earned $ 2.1 trillion in 2013 and paid $ 419 billion in corporate taxes. After-tax profit of $ 1.7 trillion was 10% of gross domestic product in the year, the first full year it has been this high. In 2012 it was 9.7%, a record in itself.
Until 2010, the highest level of after-tax profits on record was 9.1%, in 1929, the first year the government began calculating that number.
Before taxes, corporate profits made up 12.5% of the total economy, matching the previous record set in 1942, when World War II boosted the profits of many companies. But in 1942, most of these profits were taxed. The effective corporate tax rate stood at nearly 55 percent, in stark contrast to the figure of less than 20 percent last year.
The trend of rising profits and falling effective taxes has been strengthening for years, but really accelerated after the Great Recession which temporarily lowered profits in 2009. The effective rate was less than 20% on the previous year. over three of the past five years. Prior to 2009, the rate had not been this low since 1931.
The highest statutory corporate tax rate in the United States is 35%, and companies have been lobbying vigorously to reduce it, saying it puts them at a disadvantage compared to companies based in other countries, where rates are lower. But there are a myriad of tax credits, deductions and preferences available, especially for multinational companies, and the result is that effective tax rates have come down for many companies.
The Commerce Department also said total wages and salaries last year stood at $ 7.1 trillion, or 42.5 percent of the entire economy. This was down from 42.6 percent in 2012 and lower than any year previously measured.
Including the cost of employer-paid benefits, such as health insurance and pensions, as well as the employer’s share of social security and health insurance contributions, the total cost of compensation was of $ 8.9 trillion, or 52.7% of GDP, compared to 53% in 2012 and the lowest level since 1948.
Benefits have been a steadily increasing cost to employers for many decades, but this trend seems to have ended. In 2013, the figure was 10.2%, the lowest since 2000.
One way to look at the current situation is to compare 2013 with 2006, the last full year before the onset of the recession. Adjusted for inflation, corporate profits rose 28%, before taxes, last year. But taxes fell 21 percent, so after-tax profits rose 36 percent. At the same time, total employee compensation increased by 5%, less than the 7% increase in the working-age population over the same period.
Several reasons that have been put forward like explanations of the decreasing share of national income going to workers, including the effects of globalization which have shifted some jobs to lower paid foreign workers and the declining bargaining power of unions.
The attached graphics compare President Obama’s administration with each of its predecessors, dating back to Herbert Hoover. After-tax corporate profits during President Obama’s five years in office averaged 9.3% of GDP, two percentage points higher than the 7.2% averages under Lyndon B. Johnson and George W Bush, previously the presidents with the highest corporate earnings ratios.
The stock market reflected this strong performance. At the end of March, the Standard & Poor’s 500 Index was up 133% since Mr. Obama’s inauguration in 2009. Of the 13 presidents since 1929, only Bill Clinton and Franklin D. Roosevelt have experienced a larger total increase. On an annualized basis, the Obama administration’s earnings are 17.7% per year, more than any of the previous presidents. Figures reflect price changes and are not adjusted for dividends or inflation.