by Chris Turner, Advisor Perspectives dshort.com
Those who remember the TV series Hee Haw will understand the title. Those who don’t can watch the YouTube clip below the jump for some perspective. My subject today examines the popular argument that the United States is heavily taxed versus the rest of the world. Rather than delve into whether corporations should be taxed or not, let’s just focus on what has actually happened and review other outcomes.
When searching for a method to chart corporate profits, I consulted the Bureau of Economic Analysis National Income and Product Accounts for the raw numbers. Studying before and after tax data produces the following results:
Note from the upper left to lower right in the shaded blue area which reflects the effective tax rate on corporations from 1987 to present, falling from the high around 40% in 1987 to around 20% at present. Additionally, both before and after tax profits are shown with both being at all-time highs. While the advertised 35% corporate tax rate remains popular, the truth is that corporations pay far less than the 35%. Interestingly, the total amount of corporate profits for the last 23 years was 25.5 Trillion and the after tax profits were 18.5 Trillion.
As a thought experiment, let’s ask a simple question: What would be the difference in tax collections if post-1987, corporations simply paid a flat 35% without “loopholes?”
Again, the shaded area depicts the flat 35% tax rate. But, this time the red line shows how much taxes would have been collected during the time frame assuming the corporate profits remained the same. The green line shows the actual taxes paid. Readers can easily see the roughly 250 billion difference due to the low tax rates of 20% at present.
Using this method would have produced a little over 8.9 Trillion in taxes paid to the public coffers versus the actual sum of 7 Trillion taxes paid. That might be close enough to 2 trillion to warrant my the lyrics of my title: Where O Where Did My Two Trillion Go?
Whether or not corporations should be taxed is not the issue of the day. As for my own preference, eliminating both personal and corporate income tax and substituting a consumption tax that excludes staples or nondiscretionary necessities would be a better alternative than our current system. Of course, in another 23 years, all products would be lobbied into the “non-discretionary staple” category.
Ultimately, choosing the best tax rate on corporations should be left to those running for political office. However, with an understanding of the charts above, readers will be armed with some actual knowledge of current tax policy implications.