Thursday, April 18, 2019

Societal Slack and Progressive Taxation: A Second Look (Part I-Corporate Income Tax)

Like my old piece on "Societal Complexity and Diminishing Returns in Security" it seems that a post I wrote a decade ago on "Societal Slack and Progressive Taxation" is getting some new attention.

The essentials are simple. The piece notes that while the highest earners' share of tax has risen markedly in recent decades, it has not risen so markedly as their share of income, so that their burden is lighter relative to their means, not heavier. At the same time corporate income tax fell as a proportion of Gross Domestic Product and Federal revenue. By contrast, the share of payroll taxes held steady in the 30-40 percent range from the 1970s forward. All this meant that the rich paid less, the poor more, in a more regressive system.

Checking the numbers again recently--in this case, those in the Historical Tables of the latest edition of the Budget of the U.S. Government (Table 2-2)--suggests that for the past decade the situation did not change very much until the current administration, though clearly this is happening with corporate income tax. After 1945 the trend in its share of Federal revenue was downward, from 35 percent that year to around 15 percent in the 1970s, then generally the 8-12 percent range after Reagan, sometimes dipping a bit below, sometimes rising a bit above. In 2018, following Trump's tax cut (knocking the corporate income tax rate from 35 to 21 percent, while the loopholes remain), it hit a historic new low--a mere 6.1 percent of the total.

As a share of GDP (see Table 2-3) corporate income tax has also fallen. Generally in the 4-5 percent range in the 1950s, and the 3-4 percent range in the 1960s, 2-3 percent in the 1970s, it has generally been 2 percent or less since Reagan, save in periods of exceptional profits (the Clinton-era boom, the heady years just before the crash of 2008). The Trump tax cut similarly knocked corporate income tax down to a mere 1 percent of GDP in 2018, a level seen in only one previous year--2009, after the crash.

The decline in the amount of corporate income tax paid has generally gone alongside rising after-tax corporate profits. According to Federal Reserve data, after-tax corporate profits generally ran in the 5-7 percent of GDP range in the 1950s, the 6-7 percent range in the 1960s, and 7-8 percent in the 1970s (despite a sharp dip amid the 1974-1975 recession). They collapsed in the '80s, bottoming out in 1986 at around 3.7 percent of Gross Domestic Product before beginning a fitful upward climb, approaching 7 percent again in the '90s, and then despite ups and downs, in the early 2000s ascending toward heights unscaled since the Korean War era. In 2004 profits hit 8 percent of GDP, the next year 10 percent, roughly the level at which they have stayed ever since.

It is worth noting that in the much higher-tax 1950s private investment levels were roughly equal to what we have now (in the 15-18 percent of GDP range), and arguably the investment directed more fully toward substantive economic activity.

This suggests that corporations could pay much more than they have generally been doing, without any harm being done to investment. Moreover, were they paying that higher but clearly quite tolerable '50s-era proportion of tax, that would be 2-4 percent of GDP more than they have generally been doing to date--an additional $400-800 billion a year. And of course, the figure was still higher in the war years--more like 7 percent of GDP in 1944-1945 at the height of the war effort (another $400 billion, bumping us up to the $1 trillion a year range).

I suspect it might also be easier to administer such a tax on a handful of large corporations than to raise an equivalent sum from individual households, though one should also remember that this would not at all rule out a higher income tax rate--those years when corporate tax rates were so high in the 1950s also years in which the top income tax bracket was 91 percent.

You can expect me to say something of that matter in another post, to appear shortly.

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