Trump is wrong: corporate tax cuts aren’t the best way to boost the US economy
Stephen Roach says national income statistics show the weak link of the economic chain isn’t US businesses, which remain highly competitive globally, but vulnerable American workers, which accounts for weak consumer demand
Corporate tax cuts are coming in the United States. While this push predates 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.
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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 per cent of national income in the third quarter of 2016.
It is a real stretch to bemoan the state of corporate earnings in the US
While that is down from the 11 per cent 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 anaemic, the current GDP share of after-tax profits is well above the post-1980 average of 7.6 per cent.
Trends in corporate taxes, which stood at just 3.5 per cent of national income in the third quarter of 2016, support a similar verdict. Yes, the figure is higher than the post-2000 level of 3 per cent (which represents the lowest 15-year average tax burden for corporate America since the 2.9 per cent reading in the mid-1990s); but it is well below the 5.2 per cent average share recorded during the boom years of the post-second-world-war era, from 1950 to 1969. In other words, while there may be reason to criticise the structure and complexities of the US corporate tax burden, there is little to suggest that overall corporate taxes are excessive.
Conversely, the share of national income going to labour has been declining. In the third quarter of 2016, worker compensation – wages, salaries, fringe benefits and other so-called supplements such as social security, pension contributions and medical benefits – stood at 62.6 per cent of national income. While that represents a bit of a rebound from the 61.2 per cent low recorded in the 2012-2014 period, it is 2 percentage points below the post-1980 average of 64.6 per cent. In other words, the pendulum of economic returns has swung decisively away from labour towards owners of capital – not exactly a compelling argument in favour of relief for purportedly hard-pressed American businesses.
But what about the seemingly chronic weakness in capital spending and job creation, widely thought to be additional manifestations of overly burdened US companies? Yes, both business investment and employment growth have been glaring weak spots in the current recovery. There is a distinct possibility, however, that this is due less to onerous taxes and regulatory strangulation, and more to an unprecedented shortfall of aggregate demand.