Effective Tax Rates

Apr. 07, 2019 11:24 AM ET2 Comments
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Summary

  • Compared to the historic trend where the effective tax rate has fallen from almost 50% in 1950 to just over 10% with the recent corporate tax cut, it does not look like such a massive tax cut after all.
  • The data shows the big impact appears to be behind us and is unlikely to provide much of a boost to growth in 2019.
  • The tax cuts' impact also raises questions about promises to eliminate loopholes so that the revenue loses from lower corporate taxes would not be significant.

By Spencer England

Along with fourth quarter GDP, corporate profits for the the fourth quarter was also reported. Profits growth was either quite strong or very weak depending on how you looked at them. On a year over year basis, after tax profits growth was 11% and appeared to be accelerating. However, on a quarter to quarter basis after tax profits actually fell -6.73% (SAAR) in the fourth quarter and that is after a third quarter annual growth rate of only 3.7% (SAAR). By comparison after tax profits growth surged 38.4 % (SAAR) and 14.0 % (SAAR) in the first and second quarters, respectively. Much of this early 2018 growth was due to the tax cut. But now that the tax cut is behind us, it looks like the Administration's promised strong growth remains just that, a Republican forecast and we all know how seriously to take them.

After this it looks like a good time to look at the impact of the corporate tax cut on the effective corporate tax cut - taxes as a share of pre-tax profits.

The effective tax rate fell from around 20% to just over 10%. That sounds like a big drop, but compared to the historic trend where the effective tax rate has fallen from almost 50% in 1950 to just over 10% now it does not look like such a massive tax cut after all. Moreover, as the data shows the big impact appears to be behind us and is unlikely to provide much of a boost to growth in 2019.

It also raises serious questions about the Republican promises to eliminate loopholes and other special arrangements so that the revenue loses from lower corporate taxes would not be significant. I have not seen them make much of an effort along those line. But maybe I am missing something and commenters can point out such legislation.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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The Angry Bear profile picture
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In 2010 24/7 Wall St. named Angry Bear among the top twenty independent financial blogs on the net. Quote: "The Angry Bear www.angrybearblog.com. Half a dozen professionals, including a tax law expert, a historian, PhDs in economics, business consultants and financial professionals provide perspectives on the financial world. Despite their expansive coverage of economic issues, their articles are as deep as their coverage is extensive. Topics include world trade, industrial production, U.S. Government programs, and major regulatory issues." 2010 FINS from The Wall Street Journal named Linda Beale's Ataxingmatter in The Top Five Tax Accounting blogs to read for 2009-2010. Our current economists are Mike Kimel, Spencer England, Robert Waldmann, and Rebecca Wilder. Linda Beale is an expert in tax law and matters related to taxes. Ken Houghton has expertise in finance. Bruce Webb has added his expertise in particular on Social Security. Daniel Becker brings a small business perspective to his writing. Daniel Crawford: aka Rdan and Angry Bear blog Bios in alphabetical order: Linda Beale: I am a law professor at Wayne State University Law School who teaches various courses in the area of federal income tax, such as introduction to federal income tax, corporate taxation, partnership taxation, international taxation and perhaps in the future a course in statutory interpretation focussed on tax. Daniel Becker: I have two businesses: a practice in the health care field and a retail business of flowers and plants. I have served as an officer of 2 non-profits and my state society. I have testified before my state legislature. I have personally won in my state supreme court. Ken Houghton: A principle in his own company and former economist for several major financial companies. Spencer England: Before I started my own consulting business I was an economist for the CIA for 10 years and worked for a couple of Boston investment management firms as their in house economist, investment strategist for some 12 years. My original field of study was international economics and international finance. I celebrated the 20th anniversary of publishing SEER -- my equity strategy product. I model the S&P industries and advise portfolio managers on how to structure their portfolios by recommending industry weights. Mike Kimel: Formerly an economist for a Fortune 500 company and now an economist for a private corporation and author of Presimetrics blog and the book Presimetrics: How Democratic and Republican Administrations Measure Up on the Issues We Care About to be published August 2010. The book can be pre-ordered. RobertWaldmann: I have a PhD in economics (Harvard 1989) and teach economics at the University of Rome "Tor Vergata". Oddly, I don't blog much at my own site rjwaldmann about economics or Italy. As an economist (roughly) I am interested in behavioral economics, growth, and the economics of inequality. Actually much of my current research, such as it is, is really in econometric methodology and statistics. I was very unorthodox in the 80s, but the orthodoxy is much less rigid now. Bruce Webb: is a current member of the National Academy of Social Insurance (NASI). I am by training a historian who then has spent my working career in information retrieval and land use regulation. My interest in Social Security arose when I noticed in passing that the dates related to 'crisis' were moving but that nobody seemed to be noticing that and still less asking the key questions 'why?' and 'can this go on?' Rebecca Wilder: After receiving my Doctorate in Economics, I was an assistant professor for two years. However, I realized that teaching just wasn't for me and took a job in private sector. Now, I am an Economist in the financial industry. As an economist in finance, I analyze data, write commentary, and offer economic insight to traders, chiefs of staff...
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