Sunday, December 16, 2018

Who Benefits From Lower Corporate Taxation?

Un-checked conventional wisdom is a dangerous thing.  Particularly, the notion that lower corporate taxation (now 21%, down from 35%, and an all-time high in excess of 50%) would lead to accelerated economic activity via higher CapEx and accelerated corporate employment.  Alas, I will show that both these assumptions are incorrect (at least at present) and hope to begin a wider dialogue regarding corporate tax policy.  BTW - I'm all for lower taxation but only in concert with lower expenditures (quite the opposite of what is currently taking place, detailed HERE) and lower personal taxation .

Corporate Profits vs. Corporate Tax Receipts
First, checking the relationship of corporate profits (after tax) versus corporate tax receipts.  From 1950 to 1995, profits and taxation move higher in unison.

From 1996 through the third quarter of 2018, after tax corporate profits have nearly quadrupled (+381%) while corporate tax revenue has fallen by a half billion dollars (-0.4%).  Twenty two years; inflation, population growth, surging profits, and actual dollars collected from taxation of US corporations annually have declined by a half billion dollars while their annual profits have grown by $1.5 trillion!!!

Corporate Taxes vs. Personal Taxes
How does that compare with personal tax revenues?  Corporate tax revenues vs. personal tax revenues, 1980 through 2018 (below). 

Personal tax revenues

Putting the two together...

And overlaying the two, to see the differing utilization of personal taxation versus corporate taxation.

The changing sources of federal tax revenue; rising dependence on personal taxation and diminishing corporate taxation as a percent of total taxation.

So, who benefitted from the surge in corporate profits absent corporate taxation?
Corporate profits vs. Real Disposable Personal Income (per capita)
Corporate profits (after tax) versus real disposable personal income, per capita (what is left after taxation) from 1950 through Q3, 2018.  The chart below shows the miniscule relative growth of real disposable personal income on the same scale as the astonishing rise of corporate profits.  Since '01, corporate profits increased 304% while real DPI increased 28%!?!
CapEx, Corporate Profit, Corporate Taxation
Checking CapEx (private non-residential fixed investment) versus after tax corporate profits and federal corporate taxation.  During the current period, the growth in corporate profits have exceeded fixed investment.
Taking a different view, the year over year change in private non-residential fixed investment (blue line), after tax corporate profit (green line), and corporate tax receipts (red line) since 1950.

From '50 through the early '60's, the year over year change in corporate profits were matched by fixed investment and corporate taxation.  However, from the early '60's through 2001, fixed investments grew significantly faster than after tax corporate profits while corporate taxation lagged (particularly highlighted in yellow boxes below).
1980 through 2001, again note the change in fixed investment outpacing corporate profits and corporate taxation (again highlighted in yellow boxes).  This was the outcome that low corporate taxation was supposed to produce.

However, since 2001, the growth in after tax corporate profits have outpaced the growth in fixed investment.  This was/is not how this was "supposed" to work.
Full Time and Corporate Employment
Full time employees (millions) versus corporate employees (indexed).  Corporate employment outpaced that of full time employment up to 2001...but since 2001, growth in corporate employment has lagged full time employment growth by half.
Or checking the growth (per period) in after tax corporate profits versus corporate employment.  Again, it is the same picture of accelerating profits versus decelerating employment growth.
Who Benefits From Low Corporate Taxation?
Where and to whom did the corporate profits go?  They were paid out in dividends, stock buybacks, and corporate bonuses, etc..  The benefits flowed to the top 10% of the population who own 90%+ of all stocks and financial assets.  Likewise, they are the beneficiaries of rising dividends, and directly received the bonuses.  Since '01, the shrinking class of asset holders are reaping the lion's share of the benefits of lower corporate taxation.  Perhaps, as European capitals are burning for a very similar situation there, this is something worthy of greater discussion on this side of the pond?

Extra Credit...What's It All About???
The shift taking place is not coming from greater greed or the typical business cycle...we are experiencing something far larger and of greater significance.  This is the end of the population growth cycle among those who have nearly all the money and do nearly all the consuming...and absent their growth, a long term secular decline has now begun although interest rate cuts, debt, monetization, etc. are being utilized to delay the full onset of secular decline (detailed HERE, HERE, and HERE).