Wednesday, November 29, 2017

Corporate Taxes: Facts vs Fiction

In the realm of economics, there are lots of theories. There are also lots of urban legends. Both are often propagated despite lots of facts that question their credibility. Daniel Patrick Moynihan, the former senator from New York, once said, “Everyone is entitled to his own opinion, but not to his own facts.” In today’s world of “fake news,” sorting out fact from fiction is a challenge. In the realm of economics, there’s no shortage of data, which can be very helpful in discerning the difference between information and disinformation.

Which brings me to the subject of the US corporate tax rate, which Republicans are aiming to cut. The widespread view, especially among Republicans, is that the corporate tax rate is too high. They aim to pass a tax reform package before the end of the year that will lower the statutory rate from 35% to 20%. I’m all for tax cuts. However, I’m having a problem with the data:

(1) GDP data. Yesterday’s GDP release for Q3 included corporate pretax and after-tax corporate profits. The data show that corporations paid $472.9 billion in taxes over the past four quarters through Q3. This series has been hovering in record-high territory around $500 billion since Q2-2014.

Dividing this tax series by pretax profits of $2281.4 billion over this same period shows that the effective tax rate has been significantly below the statutory rate since the start of the previous decade. During Q3, it was only 20.7%!

(2) Treasury data. But wait … the plot thickens: Actual corporate tax revenues collected by the IRS have been consistently less than the corporate taxes included in the GDP measure of corporate profits since the start of the former data series in 1972. For example, over the past four quarters through Q3, the Treasury reported collecting $297.0 billion in corporate tax revenues, 37% less than the $472.9 billion shown by the GDP measure, on a comparable basis.

The shocking result is that the effective corporate tax rate based on actual tax collections was only 13.0% during Q3, and has been mostly well below 20.0% since the start of the previous decade.

What gives? I’m not sure, but I am inclined to follow the money, which tends to support the story told by the IRS data. If so, then Congress may be about to cut a tax that doesn’t need cutting. Or else, the congressional plan is actually reform aiming to stop US companies from using overseas tax dodges by giving them a lower statutory rate at home. We may not be able to see the devil in the details of the bill until it is actually enacted.

Wednesday, November 1, 2017

Happy Days for US Consumers

We live in happy times. How can that be given all the unhappy happenings in DC these days? Apparently, we are all tuning out the political static and focusing on what matters most: jobs. While our politicians continue to promise policies that will create more jobs, we are doing just that despite Washington. As a result, consumer confidence is soaring. Consider the following happy developments:

(1) Consumer confidence. Both the Consumer Sentiment Index (CSI) and the Consumer Confidence Index (CCI) jumped in October. I focus on the average of the two, which we call the “Consumer Optimism Index” (COI). During October, the overall COI jumped to 113.3, the highest since December 2000. Its current conditions component rose to 133.8, the highest since March 2001, while its expectations component rose to 99.8, its best reading since January 2004.

(2) Availability of jobs. Among the plethora of series included in the CSI and CCI surveys of consumer confidence, our favorites are the jobs plentiful, jobs hard to get, and jobs available series from the latter source. During October, 36.3% of respondents agreed that jobs are plentiful, the highest reading since June 2001. The jobs-hard-to-get percentage fell to 17.5%, the lowest since August 2001. It tends to be highly correlated with the unemployment rate, and suggests that the jobless rate is still falling.

(3) Wages. In the past, there was a reasonably good correlation between wage inflation and the jobs plentiful series This was so using the yearly percent change in either average hourly earnings or the Employment Cost Index (ECI). The latest data show that average hourly earnings for production and nonsupervisory workers rose 2.5% y/y during September, while wages and salaries in the ECI rose 2.6% during Q3. Both remain surprisingly low given the plentitude of jobs.

So why are consumers so happy? Jobs are plentiful and wages rising faster than prices. The PCED rose 1.6% y/y during September.