Is Corporate America Going to the Poorhouse?

The Financial Times recently reported that the U.S. Chamber of Commerce has spent $30 million to influence the upcoming elections, backing mostly Republicans candidates. The Chamber, upset with the so-called anti-business attitude of the Obama administration, wants a Congress that will cut corporate taxes. This rhetoric suggests that U.S. corporations have become so unprofitable they need tax relief in order to stay in business. So let’s take a look at corporate profitability.

The first figure below shows corporate profits (left axis) and corporate taxes (right axis) as a percent of national income since 1946. Corporate profits have bounced around over the last 68 years between 8 percent of national income and 14 percent. The high point over this period, however, was just last year. Furthermore, corporate profits as a percent of national income have been steadily rising since President Obama took office, though much of that is due to the recovery in corporate profits after the Great Recession. At least before taxes, corporations appear to be doing rather well in terms of profitability.

The figure also shows total taxes on corporate income as a percent of national income. Since 1946, corporate taxes have steadily decreased in relation to national income. In 2013, corporate taxes were at a level below the high point reached in the last Republican administration. The data suggests that corporate taxes have not been keeping up with corporate profitability.

Perhaps the Chamber of Commerce is concerned about a falling profit share. The next figure examines the 68-year trend in both the before-tax and after-tax profit shares (profits divided by net value-added) of domestic corporations.1 In 2013, the before-tax profit share was 21 percent, which is the highest level since the mid-1960s. Interestingly, the 2013 after-tax profit share is at a post-World War II high of 15 percent! It would appear that corporate America has been doing rather well under President Obama and the current corporate tax system.

The Chamber is correct when they say the corporate income tax system is a mess and in need of reform. But they are wrong in arguing that corporate taxes need to be cut—corporate income taxes accounted for over 25 percent of total federal revenues in the 1950s, but less than 10 percent in 2013. With corporate profits high, corporate taxes low, and the gap between the two widening, we need a corporate tax reform that will increase corporate tax revenue.

1. Value added is the difference between the value of corporate output and the value of the intermediate goods used in producing that output. It is essentially what gets divvied up between workers and shareholders. The profit share indicates the proportion of value added that are corporate profits (i.e., go to the owners of the corporations). Depreciation or consumption of fixed capital has been netted out of value added and corporate profits.