Wednesday, March 4, 2015

Corporate America - Profits and Taxes

I have posted on the subject of corporate profits and taxes before, however, in light of the changes in the corporate tax regime proposed by the Obama Administration, the subject is worth revisiting.

Let's open with a graph that shows both after-tax corporate profits (in blue) and corporate federal taxes paid (in red) since 1990:

Between the fourth quarter of 2007 and the first quarter of 2013, corporate profits rose from $1.314 trillion to $1.694 trillion, an increase of $380 billion.  Between the first quarter of 2008 and the first quarter of 2013, corporate tax remissions to Washington rose from $233.7 billion to $384.9 billion, an increase of $151.2 billion.

Here is a graph showing now the difference between after-tax profits and corporate federal taxes remitted has grown since 1990:

In 1990, the difference between after-tax profits and corporate federal taxes was $140.5 billion.  This rose to $1.376 trillion in 2013, an increase of $1.236 trillion or 879 percent.

Here is a graph that shows how Federal tax revenues as a percentage of total receipts has varied over the decades since 1950:

Corporate taxes (in black) declined from nearly 30 percent of total federal tax revenues in the 1950s to as little as 6 percent since the 1980s.

Here is another interesting graph that shows how federal tax revenues as a percentage of GDP has changed since the 1950s:

Corporate taxes (in black) have declined from over 6 percent of GDP in the 1950s to 1 percent in 2010.

In its 2016 budget, the Obama Administration is targeting what are termed "indefinitely reinvested earnings or IRE", those earnings by American corporations that are held overseas to avoid paying United States corporate taxes.  In case you wondered how much money is held overseas by Corporate America, here is a table from Audit Analytics data that shows how the IRE balances have grown since 2008:

By the end of 2013, U.S. companies in the Russell 1000 (the large capital segment of the U.S. equity market) held a total of $2.119 trillion in overseas earnings, up by 93 percent from $1.098 trillion in 2008.  It is also interesting to note that the number of companies using this tax strategy grew from 472 in 2009 to 547 in 2013.  As well, as a percentage of total assets, IRE balances have risen from 5.8 percent in 2008 to 8.71 percent in 2013.  It is these earnings that the Obama Administration is targeting with its"transition toll charge".   The administration has proposed a one-time toll charge of 14 percent on untaxed foreign retained overseas earnings, regardless of whether or not the earnings are repatriated, which would bring in an estimated $238 billion that would be allocated directly to the Highway Trust Fund to be used to repair the badly decaying national transportation infrastructure.

Let's look at a table that shows specific company data on the ten companies with the highest foreign IRE balances for the 2013 tax year and their effective tax rates:

Of course, in all cases, these corporations are functioning wholly within all foreign and United States tax laws.  What I found interesting was the fact that, in some cases, foreign retained earnings make up a very substantial part of a company's total assets, as high as 54 percent in the case of Merck and 53.6 percent in the case of Microsoft.

According to the Government Accountability Office, for the 2010 tax year, profitable U.S. corporations paid U.S. federal income taxes (i.e the effective tax rate or ETR) amounting to 12.6 percent of their worldwide pre-tax profits as reported on their financial statements.  When foreign, state and local taxes are included, their tax burden rose to an effective tax rate of around 17 percent, less than half the headline federal corporate tax rate.  This shows us that the effective corporate tax rate can vary significantly to the downside from the statutory tax rate.  As well, according to the Congressional Research Service, while Corporate America likes to complain that the top statutory corporate tax rate of 35 percent is highest in the world, the effective tax rate of only 23 percent is below the weighted average effective tax rate of the six largest OECD economies.

There is a strong corporate lobby in Washington that has the goal of shifting the tax burden away from Corporate American and placing it firmly into the hands (and wallets) of consumers.  Unfortunately for voters, it is these same corporations that donate billions of dollars to the campaigns of the politicians who have the power to reduce corporate taxes. 


  1. Here is a true story about yesterday. Covidien a major medical manufacture wants me to pay for products I have purchased from them. First I have to call to India to get another phone number and a copy of the invoice. This number sends me to the Czech Rep. who then gives me another number to someone in Massachusetts who then takes my Credit card information, where am I New York of course. I spent over 20 minutes in order to pay them(going through prompts, and waiting on hold) whats wrong with that picture?

  2. I normally enjoy your work and your analysis. However, I believe that you are misinterpreting data in your desire to show that not enough is being paid in corporate income taxes.

    First, you state that corporate profits rose by $380 billion between 2007 and 2008 and corporate taxes paid increased by $152 billion over the same period. $152 billion is 40% of $380 billion. What is your point?

    Another way to look at it is that profits went up from $1.3T to $1.7T (a 29% increase) but taxes paid went from $234 billion to $385 billion (a 65% increase). From this perspective, corp taxes have increased at a much faster pace than profits have risen.

    Second, as to your point regarding the fact that after-tax corporate profits have grown much faster than corporate revenues. This is the case because U.S corporations have largely expanded globally since 1990 and which has been a significant factor in profitability. For example, GE only had $15 billion out of $53 billion in revenues outside of the U.S. in 1990 (28%). Today, GE has $77 billion in revenues outside of the U.S out of $146 billion (53%). Thus, GE's int'l business has increased 413% while the U.S. business has only increased 82% since 1990.

    Book profits are higher but a large portion of the profits are overseas.

    As you know, the U.S. is the only major country in the world that does not use a territorial tax system. Thus, U.S. companies must contend with local taxes overseas and also U.S taxes when profits are repatriated. Tax credits are given but only up to the what was paid overseas. As long as the U.S. marginal rate is higher than other countries, U.S. companies will be very reluctant to remit profits back.

    The obvious answer is for the U.S to conform its corporate tax system to the rest of the world. It would allow billions of dollars to come back to the U.S where this capital could potentially be productively deployed.

    Raising the corp tax rate will only make the problem worse. And trying to something like Pres Obama has proposed will do nothing but push more corporations out of the United States in the long term to more attractive tax domiciles. If GE is doing more than half of their business outside of the US, why do they need to be domiciled in the US?