Thursday, April 14, 2011

U.S. Corporate Taxes: 1955 v 2010

Barry Ritholtz at the Big Picture has an interesting piece up this morning on corporate taxes in America in 1955 v 2010.  While a contentious issue surrounded by a lot of dogma, what is obviously clear is the tax burden / responsibility of our corporations has shrunk dramatically in the past 5-6 decades, requiring individuals to pick up (part of) the slack.  The rest simply is put off to another generation via ever larger debts. Tax departments (and lobbyists) have become as important as operations in our mega corporations.  While the story in the New York Times a few weeks ago on how the country's largest company, General Electric, is not only avoiding federal taxes but receiving rebates the past half decade, has caught the public's attention this has been a long standing issue.  [Mar 25, 2011: NYT - G.E.'s Strategies Let it Avoid Taxes Altogether]  "Double Irish" and "Dutch Sandwich" anyone? (what are these? see here)

Much like our multinational's have been able to game the global system with labor costs, they also are "winning" with tax policy - not just within countries, but within states.  Any astute reader can pick up his local paper and see a large corporation threaten to close and move a facility to another state if they are not handed a package of tax breaks.  Often these packages are offered by states with large deficits who can't even afford the money to put towards their pension obligations.  So you have a race to the bottom as desperate politicians try to keep jobs in state - offering incentives that are not paid for.  With a dwindling amount of jobs available in the country, the laws of supply and demand work in favor of those who offer the jobs.  And the same 'blackmail' (if you will) can be applied across countries as well.  So who is stuck paying the egregious and well publicized 35% corporate tax rate?  Small domestic based businesses.

What is the fallout from this subject via a stock market perspective?  It is fantastic - lower taxes means more profits... and higher stock prices. 

More from Ritholtz below....


GE paid no taxes; Goldman Sachs paid $14 moillion last year. The GAO reported in 2008 that “two out of every three United States corporations paid no federal income taxes from 1998 through 2005.”

As the graphic below shows, the change in corporate tax rates over the past half century is astounding.
Corporate Taxes as a Percentage of Federal Revenue
1955 . . . 27.3%
2010 . . . 8.9%
Corporate Taxes as a Percentage of GDP
1955 . . . 4.3%
2010 . . . 1.3%
Individual Income/Payrolls as a Percentage of Federal Revenue
1955 . . . 58.0%
2010 . . . 81.5%
Anyone who is serious about closing the US deficit should consider the changes in what corporations pay in taxes and the rise of the deficit.

The U.S. uncompetitive on the global stage when it comes to taxes?  Not in reality - see chart below
  • ....the effective corporate tax rate is actually lower than in the U.S. than many other countries. A recent study by the World Bank showed that the U.S. effective tax rate was below that of many of our top competitors, including Germany, Canada, India, China, Brazil, and Japan. As well, corporate taxes make up a lower percent of GDP in the U.S. than in many other industrialized countries.

[click to enlarge]

Original source material.

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