Falling Corporate Taxes Are An Old Story, Not Just Under Trump

The current state of the economy—the personal economy of real people—is precarious for too many. About 12 million have now lost unemployment benefits according to the left-leaning Century Foundation. No income, with no job and no immediate prospect of getting one. The CDC eviction moratorium is ending, so homelessness is the future of a large group of men, women, and children.

All happening in the dead of winter, which is bitter in many parts of the country. But even when the air is balmier, being out on the street is no way to start a new year.

Congress may be feckless in the context of the average individual, but it highly effective for cutting corporate taxes. Yes, the 2017 so-called Tax Cut & Jobs Act was a prime example. Precious little investment in hiring and facilities that its proponents claimed. But taxes came down to a record low since the 1940s.

Then again, the downward movement of corporate taxes in effective terms, or the rates they actually pay on profits rather than some statutory one, isn’t new. This is long-term process, as the graph below shows.

The percentages come from Federal Reserve data. Take the difference between before-tax profits and after-tax profits to get the amount of taxes. Divide that amount by the before-tax profits and the result is the percentage of profits paid in taxes—or the effective tax rate.

MORE FOR YOU

That rate goes up, it goes down, but there is an overall trend. This isn’t a case of “pay more with Democrats and less with Republicans.” For example, the effective corporate rate went up significantly in Reagan’s second term. George W. Bush presided over a drop and climb. Roughly the same thing happened under Obama.

But given chances in party in both the White House and Congress, the downward direction has been pronounced. People get distracted by the statutory rate. Remember, going into the tax legislation in 2017, how supporters nearly wept in their concerns over competition. An oppressive 35%! At least according to the political marketing.

In actuality, the effective rates were between 14% and 15%. There are many reasons, including loopholes to generate paper reductions in profits, companies that previous losses they brought forward, and that many corporations, including small ones, according to the IRS, pay no federal taxes. That brings the average down. As of the third quarter of 2020, it hit 12.1%. Ten percentage points down from the new low statutory rate.

That is so much further below what the average taxpayer sees. In the U.S. progressive tax system—sorry, had to take a choking break—the part of your income that sees a 12% rate is the amount between $9,875 and $40,125 in taxable income that you make in a year. And it goes up from there.

Consider keeping a minimum of 10% more of your income. Or, cutting the rate by half for what you earned over $85,526. Even bigger rate reductions when incomes go up higher.

The trend is what’s important. People get fixated on what happened yesterday or last week, or maybe last year with luck. But holding to the narrative of “the GOP loves businesses, and the Democratic party is for the little guy” is naïve. Both parties love companies that pour money into campaign funds through one means or another, and which lobby heavily.

And a reminder, it’s not just the low rates that matter. It’s the escalating gross amount of profits. Here’s a graph I used recently, showing aggregate corporate profits through the third quarter.

Ever more money—trillions a year—with less and less taken in taxes, even as debt balloons and societal need is great. It’s the American political way.