Tuesday, February 28, 2017

Corporate tax cuts aren't magic

Found via Axios, Stephen Roach with an argument against the Trumpian take on corporations and tax:
Corporate tax cuts are coming in the United States. While this push pre-dates last November’s presidential election, President Donald Trump’s Make-America-Great-Again mantra has sealed the deal. Beleaguered US businesses, goes the argument, are being squeezed by confiscatory taxes and onerous regulations – strangling corporate earnings and putting unrelenting pressure on capital spending, job creation, and productivity, while sapping America’s competitive vitality. Apparently, the time has come to give businesses a break.

But this argument raises an obvious question: If the problem is so simple, why hasn’t this fix already been tried? The answer is surprising. 

For starters, it is a real stretch to bemoan the state of corporate earnings in the US. Commerce Department statistics show that after-tax corporate profits (technically, after-tax profits from current production, adjusted for inventory and depreciation-accounting distortions) stood at a solid 9.7% of national income in the third quarter of 2016.

While that is down from the 11% peak hit in 2012 – owing to tepid economic growth, which typically puts pressure on profit margins – it hardly attests to a chronic earnings problem. Far from anemic, the current GDP share of after-tax profits is well above the post-1980 average of 7.6%.

Trends in corporate taxes, which stood at just 3.5% of national income in the third quarter of 2016, support a similar verdict. Yes, the figure is higher than the post-2000 level of 3% (which represents the lowest 15-year average tax burden for corporate America since the 2.9% reading in the mid-1990s); but it is well below the 5.2% average share recorded during the boom years of the post-World War II era, from 1950 to 1969. In other words, while there may be reason to criticize the structure and complexities of the US corporate tax burden, there is little to suggest that overall corporate taxes are excessive. 

Conversely, the share of national income going to labor has been declining. In the third quarter of 2016, worker compensation – wages, salaries, fringe benefits, and other so-called supplements such as social security, pension contributions, and medical benefits – stood at 62.6% of national income. While that represents a bit of a rebound from the 61.2% low recorded in the 2012-2014 period, it is two percentage points below the post-1980 average of 64.6%. In other words, the pendulum of economic returns has swung decisively away from labor toward owners of capital – not exactly a compelling argument in favor of relief for purportedly hard-pressed American businesses.

Update:  and on the Australian scene, Greg Jericho sums up the Grattan Institute's report that lowering the corporate tax rate is going to hurt the budget bottom line significantly, with any expected benefits taking too long to arrive to avoid that.  

Sounds quite plausible to me.  

1 comment:

not trampis said...

?Company tax cuts merely exacerbate the business cycle.
If things are going well then investment will be greater. If things are not then cutting taxes aint going to do a thing.

Under Obama profits were great but demand was not hence poor investment.