Corporate tax deadbeats
Biden and Congressional Democrats are talking about raising the corporate tax rate. The latest proposal looks to be boosting it from 21.0% to 26.5%, marked down from the 28.0% level that the administration circulated in April. While that would be a step in the right direction, it only begins to address the seven-decade erosion in what business pays.
Graphed below is the effective tax rate for nonfinancial corporations, drawn from the national income accounts. “Effective” means the rate actually paid—taxes paid divided by profits—not the rate on the books before clever lawyers and accountants do their evasive magic.
In the 1950s, firms turned over about 50% of their profits to federal, state, and local tax authorities. That fell to 40% in the 1960s and 1970s. The Reagan revolution took the rate down to near-25% in the mid-1980s. It rose a bit off those lows, but began declining again, hitting a post-World War II low of 15% following the Trump tax cuts of 2017. Yet Corporate America is whining about the possibility of taking the rate back to where it was roughly ten years ago, when capital was hardly suffering from confiscatory taxation.
Lobbyists and publicists claim that cutting corporate taxes spurs investment, and with it innovation and employment. In fact, investment has been declining at a rate similar to the tax rate. Graphed below is net private fixed investment—net, that is, of depreciation, an estimate of the effects of wear and obsolescence on the existing capital stock. If new investment is only keeping up with the rot of the old, net investment would be 0. We’ve been doing somewhat better than that, but not much.
The two lines of the graph show total investment in buildings, machinery, and intellectual property (IP) as a percent of GDP, and that with IP taken out. A lot of IP consists of pointless patents designed to maximize economically pointless things like brand value and to limit competition from new entrants, so it’s not obvious how much of an economic good IP investment really is. Note that both lines have traced a steady downtrend. There were strong bursts of investment in the 1960s and late 1970s, and a less dramatic rise in the late 1990s—but it’s been mostly downhill since. Recent peaks around 2015 and 2018 are in the same neighborhood as the recession-induced lows of the mid-1970s and early 2000s. So far this year, net business investment is 1.5% of GDP, up from the pandemic-induced low of 1.2% last year, but still one of the lowest on record. It means that corporations are barely keeping ahead of decay.
It’s not like firms are short of cash; there’s no evidence of a declining rate of profit in the national income accounts. It’s just that corporate managers would rather stuff their shareholders’ pockets with cash rather than investing in buildings and machines. They’ve spent $8.6 trillion on buying their own stock to boost its price since 2000, well over half of it since 2012. Add to that $6.0 trillion in traditional dividends and we’re talking some serious money—almost $15 trillion since 2000. That’s over twice what the entire corporate sector has paid in taxes over the same period. How nice for their shareholders and their top execs, who are largely paid in stock now. It’s not so nice for the rest of us though.