By Levi Roethler via Iris.xyz
In the first part of this series, we looked at the motivation behind tax reform, which essentially amounts to giving significant tax breaks to corporations. Our piece discussed the fact that U.S. corporations are not in fact heavily taxed compared to their counterparts abroad.
In this piece, we examine the second assumption driving tax reform i.e. corporations will use tax savings to raise investment spending, which in turn will raise productivity and wages. We start by looking at what corporations choose to do with their excess profits, especially in recent years.
Corporate profits have surged
As we discussed in the first part of the series, companies have used a variety of strategies to keep their effective tax rates far below the marginal rate of 35 percent, and profits have soared. Corporate profits as a percentage of GDP fell from 7.6 percent in 1980 to as low as 3.3 percent by 1986, which was likely due to the recession in the early 80’s.
However, by 2004 corporate profits surpassed 8 percent and reached as high as 10.8 percent of GDP by 2012. That figure has stayed relatively constant since, slowing to 9.2 percent of GDP in the second quarter of 2017.
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