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Record Corporate Profits Don’t Help Economy

The New York Times has an amazing graph that clearly disproves the notion that low corporate taxes and high corporate profits will create unprecedented economic growth and millions of new jobs. Corporate profits are at an all time high even while wages and business taxes have gone down and unemployment has soared. Here’s the graph:

Some key things to notice. Corporate after tax profits have literally doubled over the last 10 years and the last 50 years as well. Wages have fallen both long term and short term. Corporate taxes as a percentage of profits has dropped in half since 1960. Personal taxes as a percentage of personal income has remained almost exactly the same. And though this is not included in that graph, corporate taxes as a percentage of federal revenue has dropped from more than 30 percent 50 years ago to less than 10 percent now.

Corporate profits after taxes were estimated to be $1.56 trillion, at an annual rate, during the quarter, or 10.3 percent of the size of the economy, up from 10.1 percent in the second quarter. Until 2010, the government had never reported even a single quarter in which the corporate share was as high as 9 percent, as can be seen in the accompanying charts.

We are continually told by the right that lower corporate taxes will unleash an economic boom and solve the unemployment problem. Yet corporate profits have never been higher than they are now, and in fact they have nearly doubled in the last three years as we have suffered through the worst recession since the Great Depression. If there’s a connection between corporate profits and unemployment, it seems to be an inverse correlation.

Profit is not a bad thing. We should want companies to be profitable. A company that has no profits isn’t going to employ anyone, for obvious reasons. But even at a time of record profits, corporations continue to spend massive amounts of money to buy politicians to lower their taxes even further, even when their taxes are already at all time lows. And more than one Republican presidential candidate has suggested, quite seriously, that all corporate taxes should be eliminated. This is simply perverse.

Comments

  1. says

    I think presidential debates would interest me more if we could force the candidates to demonstrate the alleged sanity of their position with graphs and citations.

  2. barbarienne says

    This is what happens when we don’t teach children basic math and logic.

    Of course, that might have been certain people’s plan all along.

  3. Phillip IV says

    Record Corporate Profits Don’t Help Economy

    Of course they do! But they don’t necessarily help the national economy, that’s the small but crucial detail free market libertarians like to omit. Low corporate taxes and high corporate profits will create unprecedented economic growth and millions of new jobs – just not here.

  4. says

    Forgive me, those years are kind of a blur for me. About all I remember of Ross Perot involved jokes about his big ears and “I quit I’m back I quit.”

  5. D. C. Sessions says

    Since we know that cutting taxes on corporations and the wealthy causes prosperity [1] to trickle down on the rest of us, all that the data shows is that we haven’t done it enough. That’s why we need to cut taxes on corporations and capital gains to zero.

    [1] That is prosperity trickling down on us, isn’t it?

  6. Aquaria says

    I think presidential debates would interest me more if we could force the candidates to demonstrate the alleged sanity of their position with graphs and citations.

    Are you sure that’s what you want?

    Notice what the graph here actually says.

  7. says

    Ed writes:

    corporations continue to spend massive amounts of money to buy politicians to lower their taxes even further, even when their taxes are already at all time lows. And more than one Republican presidential candidate has suggested, quite seriously, that all corporate taxes should be eliminated.

    Corporations spend more money on politicians, and republicans want to eliminate corporate taxes. Can there be a connection? Is it possible?

    Maybe politicians see that as the trickle down piece. Spending on politicians, after all, is up. So if corporations paid less taxes, maybe spending on politicians would go up even more! That would be a great thing, yes?

  8. Dennis N says

    We should want companies to be profitable.

    I do! In the general sense. But I don’t want Goldman Sachs, run by Lloyd Blankfein to be profitable. Or Citi or Deutsche Bank. In fact I would like a good chunk of them sent to jail, and most of the rest sent to ethics classes. I would be happy to see them all replaced by responsible corporate citizens, not pinnacles of greed.

    It’s not that capitalism doesn’t work, it’s that 1) capitalism needs to be regulated like all competition (there’s a reason you can’t knife the catcher in the gut when sliding into home base) and 2) what we have is not capitalism, it’s a massive machine built to transfer money from the less well-off to the upper 1%.

  9. says

    There is a corporate and investment culture where the drive to increase profit is so intense that profitable companies will lay off workers in order to become even more profitable. Hiring workers would cut into these record profits and anyone who thinks that corporations would do that (which would also eat into executive bonuses) hasn’t been paying any attention.

    As unemployment increases, who do corporations think will be able to buy their products?

    Slightly off topic: I’ve seen conservatives and libertarians argue to abolish minimum wage jobs, dismantle unions, destroy social safety nets, and get rid of environmental regulations. My question is, are they trying to turn the United States and (as a Canadian) Canada into Third World countries? Do they want to save on transportation costs by having their sweatshops closer to consumers?

    Slightly more off topic: I’ve always wondered how, for example, Tiger Woods felt about the money he got from Nike when it compares to what they pay workers to make their products. Do those millions of dollars help celebrity endorsers sleep at night?

  10. Michael Heath says

    Ed asserts:

    The New York Times has an amazing graph that clearly disproves the notion that low corporate taxes and high corporate profits will create unprecedented economic growth and millions of new jobs. Corporate profits are at an all time high even while wages and business taxes have gone down and unemployment has soared.

    I’ve re-thinking my positions based on this graph for a couple of days now. I think we need more dialogue from experts to optimally understand how these findings inform us. A couple of factors we also need to consider not inherent to these graphs:

    1) We can’t assume past correlative relationships will continue to hold, e.g., GDP growth will lead to the same or greater correlative increase in demand for labor, effective tax rate correlations to GDP growth . Global economic conditions in the 2000s have dramatically changed since the 1960s-1990s where we have more global competition. We can compete on the amount we tax businesses to attract domestic business operations but wisely choose not to when it comes to wages. That’s wages from a managerial perspective which would include healthcare and retiree benefits including payroll withholding taxes.

    2) Businesses pay more taxes than this graph shows, they forget businesses also pay state and local taxes and consider all taxes along with other certain costs when making managerial decisions.

    3) Corporate profits have historically went up in a recession in spite of employment lagging. This is a well-known fact amongst businesses and economists and is validated above. The reasons as I understand them (and experienced them) are:
    a) because they were labor-heavy relative to recently developed productivity capabilities prior the the advent of a drop in demand. Recessions motivate bigger lay-offs, some of which is due to decreased demand. But companies subsequently learn in recoveries they were in fact fat. Even ex-GE CEO Jack Welch was amazed at this phenomena displaying itself in this past recession with a company he’s a board member of (forgot their name), where their labor productivity spiked around 25% after their demand recovered.
    b) They reduce their variable costs and new product development costs when a recession hits; relying more on selling inventory built prior to or during the recession. This improves cash flow and short-term profits but at the expense of long-term growth.

    Therefore I’d argue these graphs do not automatically argue we can confidently raise the effective tax rates of corporations without compromising long-term economic growth. We have insufficient information (the effective tax rate of all taxes), and need to see some regression analysis on certain economic events to long-term growth rates. And then we also need to consider how current conditions disqualify past correlative or causitive relationships.

  11. says

    A company that has no profits isn’t going to employ anyone, for obvious reasons.

    That can’t be right. Companies making no profit can still employ many people. After all, profit isn’t used to pay employees, profit is what’s left from the revenue after employees and other expenses have already been paid. It’s companies that don’t make revenue that can’t employ anyone. The only problems that a company without profits has is a lack of investing, not that it can’t employ people.

  12. Aquaria says

    We have insufficient information (the effective tax rate of all taxes)

    Why don’t you follow the links, Heath?

    The report showed that effective tax rates, both corporate and personal, are well below where they were during most of the post-World War II era.

    I don’t know how much clearer they can be about that part!

    For the rest that you wondered about, why don’t you email the writer? He might be able to tell you where to find the data. Some of it is apparently publicly available stuff.

  13. D. C. Sessions says

    Mr. Heath: I’m not aware of any data whatsoever indicating that state and local corporate taxes have increased anywhere in the USA. Which doesn’t mean that they haven’t, but we do know that many locales have been cutting corporate taxes (Arizona, Wisconsin, Ohio, Florida, Texas …)

    Also, at least some of the data I’ve seen on corporate taxation is based on balance sheets rather than jurisdictional receipts, and those also show taxation going down. Those studies are limited by the fact that multinationals report taxation in all countries together rather than just i the USA, but the US-only corps seem to be headed down along with the multinationals.

  14. says

    @Tabby Lavalamp in #13:

    As unemployment increases, who do corporations think will be able to buy their products?

    Yes, that neatly sums up how some of the “pro-business” policies don’t even serve the long-term interests of the businesses themselves. I could add many others, like how do they think their customers will reach their businesses with a deteriorating (and sometimes literally collapsing) infrastructure?

    And yes, it does appear that the general strategy of the US currently is to turn the US into a low-wage country so that it can compete with China.

  15. says

    I think that first graph is rather interesting, if you look at where the recessions fall.

    It starts with a recession around 1960, and then the corporate profit line does a little up and down hump leading to the 1969 recession. That is followed by another hump, and a recession in 1974. Another hump, then a series of two quick recessions in the early 80s, followed by what you could describe as either two humps or a hump and flatline for the rest of that decade. A small recession in 1990, followed by a hump. The 2001 recession, followed by another hump leading into the 2008 recession. And now the upswing of the current hump is larger than ever.

    The graph is showing corporate profits as a % of GDP, and the recessions are when the GDP decreases. If corporate profits stayed constant during a recession, the line on the graph would increase during the recessions. But with the “humps” in the graph, the recessions seem to occur after the downslope has already begun, so the decreased GDP often serves instead to be the trough for corporate profit % and turns the trend around.

    During the upslopes of the “humps”, corporate profits are growing faster than the economy. During the downslopes, the economy is growing faster. It appears as those recessions occur after a period of higher GDP growth than corporate profit growth.

    I know I’m just stating the obvious, but I wanted to state it because I found it interesting. There’s probably a lot to the graph that I’m not catching as well at first glance.

    Since I’m not an economist, I don’t know for sure what policies the graph would support, but my initial thoughts are that using policy to try and keep corporate profits as a % of GDP somewhat stable would be beneficial (i.e. if in the future we see we’re in a downslope, maybe change policy to try and reverse it a little?).

    One other thing to point out- the line from 2002-2009 on the first graph pretty closely matches that as the graph showing corporate taxes as a % of corporate profits. That is strange since the two graphs seem to be opposites before 2002.

  16. Chris from Europe says

    I would suggest to stay with higher corporate taxes and better finance punemployment insurance and programs like Germany’s short-time work. Here government assumes part of the payment to make up for the reduced loans (under special conditions, of course). This prevents companies from losing too much trained workers and demand from crashing.

    @Marcus:
    The blog prevents deep linking to images.
    http://www.viren.ca/blog/we-told-them-the-wealth-would-trickle-down/

  17. Dennis N says

    programs like Germany’s short-time work. Here government assumes part of the payment to make up for the reduced loans (under special conditions, of course). This prevents companies from losing too much trained workers and demand from crashing.

    Even if it works in ideal conditions, American corporations will find a way to abuse it for cheap labor, the way they use temping agencies now.

  18. Chris from Europe says

    @Ing
    Okay, but my point was actually to use the additional tax revenue to stabilize the economy and provide incentives to keep employees instead of cutting down.

  19. Chris from Europe says

    @Dennis N
    But what is the alternative? There must be another program instead that ideally doesn’t rely on explicit approval by Congress.

    Isn’t it actually a desired side-effect of current legislation that corporations can drive wages down? It seems to be official strategy for the Republican party and not just now, but at least since Gingrich was Speaker. Maybe it would be time to fix this instead of refusing other solutions.

    You could tie such a program to strong conditions (and hope they won’t be undermined). My idea would to make the agreement of involved unions necessary. No unions, no program. And I think workers’ councils should be mandatory even for non-union shops above a certain size.

  20. cheesynougats says

    @Michael,

    “3) Corporate profits have historically went up in a recession in spite of employment lagging. This is a well-known fact amongst businesses and economists and is validated above.”

    This is interesting, and I’ve seen some sign of it in previous employment. However, I would like a reference on it being well-known.

  21. Michael Heath says

    Tabby Lavalamp:

    I’ve always wondered how, for example, Tiger Woods felt about the money he got from Nike when it compares to what they pay workers to make their products. Do those millions of dollars help celebrity endorsers sleep at night?

    If I recall correctly their first contract was for $70 million*. That turned out to be incredibly cheap on Nike’s part given the enormous returns they immediately began enjoying because of Tiger Woods. From this perspective Mr. Woods would not be considering the price (wages) and corresponding returns of other Nike stakeholders when his first contract’s expiration date loomed and it was time to negotiate a new deal. Instead a rational businessman would be focused on getting a new price at least reflective of his fair share of the profit Nike generated because of his ability to generate revenue and profits on their behalf.

    As an ex-golf nut Tiger Woods provided a similar filter to debate stuff similar to how Barack Obama did with politics. The racism when Woods first came on the scene was barely hidden, one reason I think Phil Micheleson became more popular in spite of Woods almost complete domination over him during this era.

    Many golfers I knew then would get visibly angry with the amount of Woods’ first Nike contract, in spite of being self-identified capitalists. The rationale was Tiger doing one admittedly ill-advised commercial pointing out racism at a certain set of private clubs (when he was still not yet an adult and his affairs were managed by others rather than himself). I argued then it was the deal of the century for Nike.

  22. Dennis N says

    You could tie such a program to strong conditions (and hope they won’t be undermined). My idea would to make the agreement of involved unions necessary. No unions, no program. And I think workers’ councils should be mandatory even for non-union shops above a certain size.

    I am just saying that realistically, I gold-plated guarantee they would get undermined, if even implemented. What we would get is the government paying Walmart $4 of every employees’ $8 an hour wage while the Waltons pocket the profit. Look at all the strong conditions that came with the bailouts.

  23. Dennis N says

    Additionally, it would be a hard sell to segments of the American public. If I understand the idea correctly, the goal is keep workers skills in use. Skilled workers are usually either educated or unionized, two concepts that send a shiver up the spines of certain voters.

  24. raven says

    As unemployment increases, who do corporations think will be able to buy their products?

    Wondered that myself.

    If the US citizens are impoverished, who is going to buy the corporation’s products? Poor people in the Third World?

    Some of them get it.

    1. Proctor and Gamble makes consumers staples, i.e. laundry soap, bar soap, toothpaste etc.. Even they are taking a hit. People are buying no name generics and the cheapest stuff they can.

    2. Buffett is lately famous for asking for tax increases. It’s just self interest. Buffett owns a lot of companies that sell to…consumers. If they can’t buy, he doesn’t make more profits.

  25. raven says

    FWIW, the US is getting notably poorer.

    1. Pay per hour worked peaked in 1973 in inflation adjusted terms. It’s wandered around since, but the trend is downhill.

    2. Median US income has fallen for the last 4 years. By a lot. An astounding 10%.

    I’m surprised people aren’t out in the streets over this. Oh wait, I guess they are. The Occupy Wall Streeters have a simplistic, not all that coherent message. But they do realize things have been getting steadily worse for the average person for a long time. And they aren’t happy about it.

  26. says

    Buffett is lately famous for asking for tax increases. It’s just self interest.

    It’s also the biggest case of screaming “FUCK YOU I GOT MINE!” ever. The guy’s lived a long comfortable life avoiding paying taxes and now that he’s near the end of it, he’s just figured that out? O RLY? And what you’ll notice he did NOT do is whip out his checkbook and write a check to the IRS for some of those tax returns of his over the last 30 years.

  27. Ichthyic says

    Heath:

    your entire argument only works relative to a short period of observation; ONE recession at a time.

    those graphs show data over a 50 year period.

  28. Nibi says

    Marcus Ranum quotes raven

    Buffett is lately famous for asking for tax increases. It’s just self interest.

    and writes

    It’s also the biggest case of screaming “FUCK YOU I GOT MINE!” ever.

    Or rather, “FUCK ME I GOT YOURS!”

    The guy’s lived a long comfortable life avoiding paying taxes and now that he’s near the end of it, he’s just figured that out? O RLY?

    I’m sure he realized a long time ago that the incentive to pay taxes you are not legally obligated to is rather weak.

    And what you’ll notice he did NOT do is whip out his checkbook and write a check to the IRS for some of those tax returns of his over the last 30 years.

    Either do I, even though I strongly support a progressive tax structure. There is a reason that taxes are not voluntary.

  29. toddsweeney says

    I think I’ve finally figured out how trickle-down works.

    Corporations receive cuts in taxes and thus are able to report higher profits. Some of those profits are then spent on the politicians who lowered those taxes.

  30. Chris from Europe says

    @Dennis N
    Well, at least welfare reform should be undone. It should be replaced with a policy that isn’t based on the myth of the welfare queen and doesn’t include or allow stupid conditions like no past drug convictions.

  31. Michael Heath says

    Me earlier:

    We have insufficient information (the effective tax rate of all taxes)

    Aquaria writes:

    Why don’t you follow the links, Heath?

    The report showed that effective tax rates, both corporate and personal, are well below where they were during most of the post-World War II era.

    I don’t know how much clearer they can be about that part!

    “All taxes”, on corporations as I noted previously, would include not just the effective corporate tax rate, but also payroll withholding taxes along with state and local taxes which are also paid by corporations. I find no links providing such an analysis, which as I also noted prior, is required to get into the mind of the manager deciding where to locate business. The personal tax burden is total as noted at the bottom of the graph, but no such qualifier exists for the corporate burden graphed.

    With respect to this narrowly framed topic, business analysts don’t necessarily care so much about whose collecting taxes as they are regarding what the total effective rate is relative to competing locations’ total effective tax rate along with other keys costs I also noted, such as healthcare, retiree benefit costs, and salaries (which make up wages when also considering the payroll withholding tax). Ed’s cite provides no such information on the full tax burden. It’s still interesting graph as I noted previously I’ve been using to test some of my positions since I first saw it a few days ago, but the graphs are not sufficient to make any confident conclusions about the relationship between taxes corporations pay and GDP because their tax burden is not sufficiently characterized.

  32. Michael Heath says

    D.C. Sessions:

    I’m not aware of any data whatsoever indicating that state and local corporate taxes have increased anywhere in the USA.

    I never claimed otherwise. In fact last December when I guest-blogged for Ed I provided a graph of the total effective rate on the country relative to GDP that showed growth of state and local until the early-2000s when it started going down: http://goo.gl/nBLbo

    The bump in the late-90s in the above linked graph shouldn’t have us assuming that tax rates increased, revenue can go up based on gains on income and wealth where this was the period of the Internet stock bubble. Californians and New Yorkers were particularly hit with high taxes on their income and gains during this period.

    D.C. Sessions:

    Also, at least some of the data I’ve seen on corporate taxation is based on balance sheets rather than jurisdictional receipts, and those also show taxation going down. Those studies are limited by the fact that multinationals report taxation in all countries together rather than just i the USA, but the US-only corps seem to be headed down along with the multinationals.

    I agree.

    I do argue we need to eradicate the federal corporate tax rate, but that has nothing to with past results and instead is focused on the people reclaiming their government and providing American corporations operating here a competitive advantage on a cost factor ther global companies consider when making location decisions, especially given we choose [wisely] to not compete on no healthcare or low wages, leaving few other factors where we can level the playing field. Of course my position would require an increase on taxes on individuals, where the practical me would start with adopting the marginal tax rates used in the 1990s which would have nearly all of us seeing a hike (the idealist me favors a progressive VAT/consumption tax scheme to replace the income and capital gains taxes, though I favor a heftier estate tax to bias us more towards the meritocracy we once were relative to other countries).

  33. Chris from Europe says

    Of course my position would require an increase on taxes on individuals, where the practical me would start with adopting the marginal tax rates used in the 1990s which would have nearly all of us seeing a hike (the idealist me favors a progressive VAT/consumption tax scheme to replace the income and capital gains taxes, though I favor a heftier estate tax to bias us more towards the meritocracy we once were relative to other countries).

    Wouldn’t the executives that pay the lobbyist simply continue lobbying for loopholes to share their companies tax rate?

    I don’t believe one would end the incentive for lobbyists, simply because you can then use even more money to lobby. You can always go below a zero percent tax rate with subsidies and special infrastructure.

    My proposals re lobbying/special interests would be:
    1) Strict disclosure, not more than one-level indirection on disclosure forms
    2) Broad public funding of elections
    3) Give shareholders more power over campaign spending
    4) Increase number of members of legislatures (not just Congress, some big cities have ridiculously small councils)
    5) Eliminate low-turnout elections
    6) End judicial elections and elections for typical civil service positions, end school boards

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