Tuesday, August 7, 2018

Taxation in America - Who is Paying Their Fair Share?

As most Americans are aware, the Trump Administration has significantly cut taxes for Corporate America, touting the advantages that this will bring to the U.S. economy.  While I don't wish to get into discussing the advantages/disadvantages of the reduction of the headline federal corporate tax rate from 35 percent to 21 percent, there is an interesting aspect to both personal and corporate taxes that is rarely discussed, that is, the relationship between tax receipts and the size of the overall economy.

Let's start by looking at this graphic which is sourced from FRED showing how total federal tax revenues measure up against total gross domestic product going all the way back to 1929, just prior to the beginning of the Great Depression:

It is important to keep in mind that total federal tax revenues include personal income taxes, corporate taxes, other payroll taxes (Social Security, Medicare and unemployment insurance), customs and excise taxes and tariffs among others.  As you can see, total federal tax revenues have ranged from between 15 and 20 percent of GDP going all the way back to 1943 with some exceptions including the period between the Great Depression and the beginning of World War II when tax levels were far lower than they are today and for a brief period during the dying days of the Great Recession and the two years that followed.

Now, let's look at total federal corporate tax receipts as a percentage of GDP:

This graph is quite different from the previous graph and shows us that corporate tax revenue as a percentage of the entire U.S. economy has gradually fallen from a high of 7.44 percent in 1951 to its current level of 0.74 percent (Q1 2018), the lowest level on record.

Here is a graph showing federal personal tax receipts as a percentage of GDP:

Again, you can see that this graph more closely resembles the graph showing total federal tax revenues as a percentage of GDP.  In fact, at the current level of 7.9 percent, personal tax revenues are slightly above the 71 year average of 7.73 percent and are close to the highest levels seen since 2002.

Just in case you were curious, here is a graphic showing how federal corporate tax rates have varied over the past 100 years:

At its current level of 21 percent, Corporate America is paying taxes at the lowest rate that it has experienced since 1940.  While Washington is touting the job creation and enhanced employee benefits aspects of the new ultra-low headline corporate tax rate, evidence shows that a significant portion of the tax savings are being spent on stock buybacks.  As well, as you can see from this posting, Corporate America is paying less and less than its share of tax revenue when measured in terms of the overall economy while Main Street America bears the lion's share of the nation's overall tax burden.  This situation is only going to worsen under the new 21 percent headline federal corporate tax rate.

1 comment:

  1. The structural issues that haunt America's competitiveness far outweigh the benefits of lower taxes. The ugly truth is the tax bill passed falls far short of reform and American companies still have little reason to bring jobs home, the logic that lowering corporate income tax will create a massive flow of jobs to our shore is flawed.

    Hidden within the tax bill are some provisions aimed at past violations of US tax laws that can lead to both civil fines and criminal prosecution for the corporate managers and their legal counsel who designed some of the schemes companies have used in the past. This could prove very important. More on why jobs may not come back in the article below.