NEW HAVEN – Corporate tax cuts are coming in the United States. While this push pre-dates last November’s presidential election, President Donald Trump’s Make-America-Great-Again mantra has sealed the deal. Beleaguered US businesses, goes the argument, are being squeezed by confiscatory taxes and onerous regulations – strangling corporate earnings and putting unrelenting pressure on capital spending, job creation, and productivity, while sapping America’s competitive vitality. Apparently, the time has come to give businesses a break.
But this argument raises an obvious question: If the problem is so simple, why hasn’t this fix already been tried? The answer is surprising.
For starters, it is a real stretch to bemoan the state of corporate earnings in the US. Commerce Department statistics show that after-tax corporate profits (technically, after-tax profits from current production, adjusted for inventory and depreciation-accounting distortions) stood at a solid 9.7% of national income in the third quarter of 2016.
While that is down from the 11% peak hit in 2012 – owing to tepid economic growth, which typically puts pressure on profit margins – it hardly attests to a chronic earnings problem. Far from anemic, the current GDP share of after-tax profits is well above the post-1980 average of 7.6%.