Apparently this is one of the great scandals of our time. The way corporate profits are soaring ever higher and yet corporate tax revenues are falling to increasingly low levels as a percentage of both GDP and total tax revenues. Obviously, this has been some change in the war between the plutocrats and the people and it is not the people who win. Or, of course, we could break away from the political rhetoric of the left and try to figure out what is really going on. And the answer is twofold: first, that part of this increase in profits is not quite what it seems, and second that Congress is deliberately and specifically changing the rules. No, I did not change them so that plutocrats pay less tax: rather, I changed them so that said plutocrats pay different taxes instead of corporation tax.
There is no doubt that corporate tax revenues have declined as a percentage of GDP, as this chart from FRED shows:
And yet, corporate profits are up over 10% of GDP these days. So what is really going on?
The first is that we count profit rather poorly in our GDP statistics. We include the foreign profits of American companies in the GDP. And yet, as many complain, if those profits are kept overseas indefinitely, they actually do not pay US corporate tax. And so they don’t really have any influence on the amount of corporate income tax that American businesses pay. Of course, this may be too small an amount to take note of, but it’s not really true. That’s a good 2% of GDP, maybe up to 3%. So the profits made in the US economy are rather lower than the number we calculate as part of the GDP.
The second part is that there has been a significant change in the law. As the WSJ points out:
Much is made of the tax rate that American companies pay (a statutory rate of 35%, higher than in many other countries, although American companies often take advantage of tax breaks to reduce their effective rate). But we hear less about the tax rate of pass-throughs, partnerships and other businesses whose income is taxed at the same rate as personal income, mainly because there is no number. easy to find.
Why it’s important: It wasn’t that long ago that business dominated. In 1980, only 20.7% of all business income was earned by flow-through entities; in 2011, the share had increased to 54.2%.
Notice the start date of 1980. And also notice this fold in the tax revenue line in the graph above: also from 1980. That was indeed around the time the rules were changed on what was to be a corporation taxed as a corporation and taxed on a pass-through basis. And now the reason for at least part of the decline in corporate tax revenue is becoming clear: because at least half of businesses in the United States are just not supposed to pay corporate tax. companies. Instead, he pays regular income tax.
These two factors don’t explain all of the change: but between them, they explain the majority of this puzzling question. Why are corporate profits increasing while corporate tax revenues are decreasing? About a fifth or so of corporate profits are simply not in the United States and therefore, until they arrive in the United States, do not pay corporate tax in the United States and half of all operations businesses by corporations pay standard income tax, not the business one.
After taking these two into account, there isn’t much room left for anything that might be a puzzle.