Lack Of Corporate Tax Collections Is Crashing This Economy

Includes: SPY
by: Philip Davis

We're back to the critical 2,800 line on the S&P - a great place to short!

500 companies in the S&P are making $3Tn in annual profits.

Corporate America is making $8Tn and paying $300Bn in taxes - does that sound right to you?

U.S. Citizens are making $8.25Tn and paying $2.8Tn in taxes.

Back to 2,800!

As you can see from the chart, S&P earnings are down about 1% since September but the S&P itself it up 1%, back to the critical 2,800 line (again) and we'll see if it sticks but the /ES Futures are a fantastic short below that line with very tight stops above. What I find most interesting on this chart, however, is the "value" of the S&P 500 stocks now bushing $67Tn and I'll tell you why that is important.

You can look and look and look but you can't find a good number on the total Profit of U.S. Corporations because they, and the Government, work very hard to obscure that information from the public. Why? Because if the public understood just how much money Corporate America was making and how little they are paying in taxes - there would be lynchings.

$67 TRILLION is a key number here. You know that the S&P is trading at roughly 22x forward earnings so, if the valuation is $67Tn, we can divide that by 22 and find that profits must be ~$3.05Tn. As a reasonability check, Apple alone makes $60Bn and they are about 2% of the S&P, so 50 x $60Bn is $3Tn also. We can conclude that JUST the 500 companies in the S&P 500 make an estimated $3Tn. After figuring-in $3Tn for the other 5,500 public companies, and then perhaps another $2Tn for all the private companies (Cargill, Koch, Deloitte, Pricewaterhouse, Mars, Publix, Bechtel...) that brings us to about $8Tn in PROFITS for our Corporate America. Let's see what they paid in taxes last year:

$297Bn??? That's just 1.5% of our GDP and Corporate Profits are 40% of our total GDP - they are barely paying 10% of their profits in taxes! 165M wage-earners making $50,000 a year get paid $8.25Tn - about the same as the corporations make in profits, yet they paid $1.6Tn in Income Taxes (20%) and another $1.2Tn (15%) in Payroll Taxes.

THESE are the "people" we gave $1.5Tn in tax breaks to? It takes them 5 years to PAY $1.5Tn in taxes! The American people (that's you!) had to BORROW $1.5Tn to finance tax breaks for Corporations who pay 1/10th as much tax as we pay. Also, note on the chart that we, the people, paid $1.2Tn in Payroll taxes and Social Security only paid out $939Bn - yet the GOP tells you we have to cut that. Medicare is another $600Bn and Medicaid almost $400Bn but they are fighting tooth and nail not to have Universal Health Care and get those costs under control (aside from all the money you have to pay out of pocket because the companies you work for no longer pay for health insurance).

This is MADNESS people - 165M workers make $8.25Tn and pay $2.8Tn in taxes, leaving them with $5.45Tn (less state taxes) so about $33,000 each to spend while 165,000 people who own the Corporations make $8Tn and pay $300M in taxes, leaving them with $7.7Tn (less state taxes or rebate incentives) so about $46.66M each to spend.

Since Trump took office, Corporate tax revenues have dropped 60% - about $666Bn a year less - and what have they done with the money? Not much!!! Very little investment, very little job creation, LOTS of buying back their own stock and inflating market prices which helps who? The same 165,000 people who have $46.66M in disposable income - not the poor schmucks who have $33,000 and voted for this madness!

Meanwhile, despite all the buybacks and despite all the tax breaks - the economy has been in steep decline for the past 16 months, as we saw from yesterday's GDP Report, and as we can see from this Macro Surprise Index which is as low as it was in January of last year, when we had a 10% market correction.

Trump's current budget has us on a path to rack up $35 TRILLION in debt by 2030. The $1.5Tn tax break we are giving Corporations multiplies through the years - as does the massive increases in Military Spending, etc. Even if the country does prosper - we're not going to reap the benefits of increased Corporate Profits and the Corporations are not obligated to pay our nation's debts - they can just leave if they want to - as they often threaten to do - leaving the poor citizens who can't afford to shift their assets overseas to foot the bill:

Simply having Corporate Citizens pay the same 35% our Working Citizens pay on their incomes would generate $2.8 TRILLION in tax revenues which is $2.5 TRILLION more than we're collecting now. As you can see from the charts above, we're "only" spending $700Bn more than we currently collect so making this one, simple fix to our tax system would not only balance the budget but would pay off our deficit in 15 years!

So instead of screaming "Socialism" evey time someone suggests a solution - maybe let's consider that people like Bernie Sanders, Elizabeth Warren and Alexandria Ocasio-Cortez may actually have a point and we do need to RADICALLY rethink the way we are running this country - before we run it right off a cliff!

“Unless you believe in fairies, that is not an economy that can function without inflationary instability.” - Alan Greenspan, yesterday!

“The long-term outlook is terrible. The short-term outlook is not too bad."

Not too bad!

Have a great weekend,

- Phil

Disclosure: I am/we are short SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bullish mix of long and short positions - see previous posts for other trade ideas).