Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Ok ok, the title was a tongue in cheek reference to some of the political dogma we often hear cited. Despite the “most onerous tax rate in the developed world” of 35%, the reality is an effective corporate tax rate that was roughly 25% in the late 80s through 2000, and since then has been mid teens to mid twenties (with a few exceptions). Obviously the current 12.1% is a statistical anomaly due to some incremental tax breaks that supposedly follow on the same premise of ‘creating jobs’ – however many in the economics world will say that without end demand there will not be any serious job growth no matter what the corporate tax rate is/was. But it should be clear it is not taxes holding back job creation – there was plenty of job creation in the 80s and 90s at far higher tax rates.
As stated in another story, it is an interesting situation where profits have rebounded to all time highs, but tax receipts are almost half of what they were in 2007. [Jan 4, 2012: Corporate Profits at All Time Highs, but Taxes Almost 50% Lower than in 2007] From an investing perspective we can see why a weak economy and/or poor economic rebound need not interfere with a strong(er) stock market. Along with a labor pool in no position to negotiate, all sorts of goodies are doled out from D.C., putting a charge in profits.
It will be interesting to see how the proposed ‘overhaul’ of the tax system plays out in the years ahead, as we can see from the data above and various stories posted over the past few years – many very influential [multinational] companies not only pay below the 25% rate bandied about as the “new corporate tax rate – without loopholes”, but sometimes something along the lines of 10-18%. They will (ironically) be fighting against changing the system from the “most onerous tax rate in the developed world”….
Via WSJ:
- U.S. companies are booking higher profits than ever. But the number crunchers in Washington are puzzling over a phenomenon that has just come into view: Corporate tax receipts as a share of profits are at their lowest level in at least 40 years.
- Total corporate federal taxes paid fell to 12.1% of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30, according to the Congressional Budget Office. That’s the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008. (don’t let those who preach dogma see that 25.6% figure! Facts are so inconvenient…)
- So where is the money? There are a lot of moving pieces, budget watchers say, but one view shared inside Washington is that a temporary tax break—supported by both political parties—is a key reason. This tax break, known as “bonus depreciation,” has allowed companies to write off investments in goods like industrial equipment, manufacturing machinery and computers in the year in which they’re bought rather than over time. The White House estimates the subsidy has saved companies roughly $55 billion in corporate income taxes over each of the past two years.
- Companies just reporting fourth-quarter earnings made clear they have aggressively taken advantage of the tax break, which lasted in full through December. Union Pacific Co. said the benefit lowered the railroad’s taxes by $450 million last year compared with the year before. Energy company Dominion Resources Inc. has said the bonus depreciation provision will cut its income taxes by $1.2 billion to $2.1 billion in 2011 through 2013, even as the tax break shrinks. Shedding light on its 2011 taxes,Time Warner Cable Inc. said it expects to pay $700 million more in taxes this year, assuming capital expenditure is flat, now that the stimulus benefit is lower.
- The tax break shrinks for calendar 2012. Now, companies can write off only half of their investments, but the White House has proposed expanding it to again cover 100%. The White House estimated this would cost roughly $5 billion, as it only accelerates deductions businesses would otherwise have taken over time. Business groups have supported the tax break, and some are now lobbying Congress to extend it through 2012.
- The breaks may be helping stanch a years-long economic downturn, but they are also extracting their own price. Companies paid just $181 billion in federal corporate taxes in fiscal 2011, about 8% of the $2.3 trillion in total revenue collected by the federal government. That’s down from 15% of the total in 2007.
- Last week, the CBO raised its projection for the government’s 2012 budget deficit from $973 billion to close to $1.2 trillion, in part because of “disappointingly low corporate tax receipts of the sort that’s a little puzzling,” CBO director Douglas Elmendorf said.
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