Janet Yellen and Pinocchio*

Janet Yellen defended the proposed increase in corporate taxes. Her main rationale seems to be that Uncle Sam needs the money for infrastructure. She claims that taxes are at an all-time low and so she wants to raise the corporate income tax.

I wrote about the incidence of the corporate income tax last week and while some of you weren’t convinced by my lucid argument, my main point was simply that it won’t just be rich folks who are impacted by the higher tax rates on corporations.

But that was last week, and this week is, well – this week. The point this week is that the problem is not that taxes are low. It’s like your kid arguing for a higher allowance because she gets less than all her friends. How can she survive if she can’t go to Paris with her friends next week?

Loving the data points so much, I put together a little table* using data from the Congressional Budget Office. I chose five years for the data – every five  years from 2000 to 2020.

The Rev column shows federal tax revenues in each of those years as a percent of Gross Domestic Product. The Exp column is federal government spending as a percent of GDP.

The item that stands out the most is that Yellen needs tax increases, but not because taxes are so low today. Sure, the 16.3% in 2020 looks low – though it is a good bit higher than the 14.6% in 2010. Obviously, recessions are not kind to taxes. The average tax rate across the five years is 17.1%.

Notice the expenditures column. In 2020, the eye-popper is the federal government spending that is 31.2% of GDP. Now that’s a whopper of a year for spending. Could all that really be for infrastructure? I don’t think so. Before 2020, the average spending of those prior four years is 20.2% of real GDP.

Point? If you want to tax corporations more, then go ahead and do it and live with the consequences. But to say that you are doing that because taxes are too low is ridiculous. Taxes are insufficient because you are spending huge amounts of money – and not much of it is really for infrastructure.

Janet Yellen – you need to go back and read the story of Pinocchio.

Year   Rev     Exp

2000   20.0    17.7

2005   16.8    19.3 (recession 2001)

2010   14.6    23.3 (recession 2008/09)

2015   17.9    20.4

2020   16.3    31.2 (recession 2020)

https://www.wsj.com/articles/a-better-corporate-tax-for-america-11617813355?mod=opinion-sf_theme_opinionmain-ribbon

Taxes Part 3 -- Who Pays the Corporate Income Tax?

Last week I wrote about corporate income taxes and focused mostly on changes over time and presidential terms. 

One astute reader of the blog commented to me that another perspective looks at who actually pays the corporate income tax. 

For example, your mother gets mad at you and then you slug your brother. The impact of your mother's scowl is on your little brother...or your sister. I don't want to be sexist here.  

It is the same thing with taxes and corporations. Let's say that your company produces canned tuna. The government decides that the owners of Charlie's Tuna Factory are rich and they should pay more taxes to the government. Clearly, the government reasons, they can do much better things with the cash than Charlie. 

So bam Charlie gets hit with a bigger tax bill. 

Charlie and his lamb-like accountant Jack put their heads together and decide how to deal with the tax increase.

Charlie feels guilty because he recently installed a plastic pool in his backyard and he is the rave of his neighborhood. Life is good for his family. He tells Jack to pay him a smaller dividend so the government can do better things with his money. 

Jack laughs so hard that he worsens his double hernia. 

"Charlie, don't be a fool. You deserve all that money you make. There are lots of other ways to find the cash to pay the extra taxes." Tuna is all ears. 

Here is what Jack said.

    Don't give your workers a raise this year. That will give you more money for taxes.

    Reduce the benefits you pay those workers.

    Fire some of your workers -- you can get by without a lot of them. Make the rest work harder and longer. 

    Give a lot less to the United Way and other charities this year. 

    There are lots of tax write-offs besides charity we can use to offset the increased taxes.  Take a trip to Paris to search for better tin cans and enjoy good wine and coffee. 

    Support politicians who will help you reduce taxes down the road.

    Get tough on your suppliers. You don't need to pay so much for oil or for tin. 

    Your sales staff do not need those luxurious Chevy Vegas. Bicycles would provide better health benefits than that silly expensive healthcare plan. 

I could go on but you get the picture. The corporation writes the check to the IRS each year but the real issue is who REALLY "pays" the tax. As you can see, it is not just the stockholders who will pay the extra taxes.me 

I tried to bring in some data on this topic. Personal dividend income surged from 2010 to 2020. It rose 239% compared to the decade before. Most of that increase came before 2015. During those two decades, personal income rose by only 79%. It is hard to see any real bump from Trump's lower corporate tax rates on dividend income. Trump becomes President in January of 2017 and his tax bill is signed in December of 2017. Dividends do rise in 2018 compared to 2017 but that increase appears to be the continuation of a trend of increases that started as early as 2012.

Are we sure that the extra trillions in taxes proposed by Joe Biden are going to be used by government in ways that are better for the country than the alternative uses?

Corporate Income Taxes 1960 to 2020

Because we are about to embark on a discussion about corporate taxes in this country, I thought I would dig into some historical data. I easily found comparative government budget data for the US starting in 1962 -- this covers 10 presidents and 58 years. 

I am not looking at amounts paid by any particular firms -- instead the total of all of them. The IRS table I found gives a number for each year as to how much the Federal government collected in corporate income taxes as a percentage of Gross Domestic Product. 

Corporations pay more than just federal corporate income taxes -- they pay excise taxes and a pretty good chunk called payroll taxes. In 2020, for example, companies paid 1% of GDP in corporate income taxes. They paid another 0.4% of GDP in excise taxes and 6.2% of GDP in payroll taxes. 

I decided to report the corporate income tax results over time by President. But I didn't attribute corporate income taxes to exactly their terms because it takes a little while to get an administration going and impacts often linger after a term. So I decided to attribute to each president the taxes raised starting in the second year of the administration through the first year of the next president's term. 

For example, Clinton's term started in 1993 but I gave that year to Bush I. Clinton's term ended in 2001 but I gave taxes in 2002 to Clinton (not Bush II).  

The table below contains the corporate income taxes collected by each president -- the percentage in his second year, the highest/lowest percentage in the mid years, followed by the percentage in the first year of the following president. 

One note -- these are not legislated tax rates. We don't know from this data whether tax rates were raised or lowered. We don't know what changes were made to the tax code. We are getting the combined impact of all those things. Did taxes (as a percentage of real GDP) go up, down, or stay the same? 

The last column contains recession years of each president's term. We know that during recessions tax revenues decline so we should point out those years when looking at the tax revenue data. 

How do we read the table? 

LBJ is the first line. In his second year the tax to real GDP ratio was 3.6%. The rate peaked at 4.1% during his term but then ended up at 3.7%. Comparing LBJ to other presidents, his corporate taxes are high but they did not rise very much from beginning to end of term. 

Reagan finished with  higher taxes despite a large decrease during his term. Ford had a similar pattern.

Clinton and Bush II did the opposite with taxes rising and then falling. The recession at the end of both their terms might explain the decline in taxes. 

Obama's taxes showed a similar pattern -- rising then falling -- but there were no recessions in Obama's years. 

Trump's numbers are pretty interesting in that they don't change much. Taxes start low and stay low. His rates are definitely lower than Obama's but we see no pattern of falling tax revenues during his years. He and Reagan are reputed to be great tax cutters and maybe they made changes -- but the end result is that tax revenues as a percent of real GDP did not fall for either of them. 

The last line will be for Joe Biden. Given all this history, what's the possibility that after all the hooting and hollering, he is going to raise a ton of money for his spending plans? 

Clinton raised taxes above those of Bush I but a recession quashed his plan. Obama raised some revenue above Bush II but he benefited by the end of a recession raising tax revenues. 

Trump's very low numbers suggest that Biden might have some room to raise taxes but we will have to wait and see. History is not in his favor. We do not see taxes jumping from the end of one President to the next one (except for small ones for Clinton and Obama). 

                     Start High/ End   Recession years                

LBJ               3.6    4.1   3.7    None

Nixon            3.1    2.4   2.7    69/70

Ford              2.5    2.3   2.7     73/75  

Carter            2.6    2.3   2.0     80/81

Reagan          1.5    1.0   1.9     81/82

Bush I            1.6   1.6    1.7     90/91

Clinton           2.0   2.2    1.4    00

Bush II           1.4   2.6    1.0    07/08/09

Obama           1.3   1.9    1.5    None

Trump            1.0   1.1    1.0   20

Joe Biden        ?       ?       ?      ?

   

Raising Income Taxes

I recently wrote about income distribution. Today I turn to income taxes. As the Biden administration unfolds plans to greatly enlarge the scope of government spending, our minds turn to how we will pay for the extra trillions spent on infrastructure, childcare, green subsidies, and so on.

It might remind you of one of those finger-pointing exercises when everyone points at someone else who should bear the burden.  Who is going to pay for those extra trillions of dollars of government spending?

Point no further – of course, it is the rich folks who should pay. One storyline reads that Trump reduced the taxes of those folks and now it is time to collect.

So, I decided to look at some data. As usual, the data can be pretty illuminating. It doesn’t really provide any final answers to whether or not we should squeeze the rich. Some of you won’t be satisfied until everyone nets $15 per hour. But let’s play this game anyway.

The data comes the Internal Revenue Service and it relates to shares of taxes paid by income category.

The data I used starts in 2001 and goes through 2018. I wish I could have gotten more years but apparently there have been changes to the methodology and the pre-2001 data can’t be compared to years after 2001. Data for 2019 has not been published yet.  We are stuck with 18 years of data.

2001 was the beginning of George Bush. He served until 2009 when Obama took over. In 2001, the top 1% of all taxpayers paid 28% of all income taxes. Note that if we had an equal distribution, the top 1% would pay 1% of the taxes. So clearly, we have a progressive tax system. 

Let's move ahead to 2018. 1% of the tax returns was about 1.4 million tax returns. That means that of the 143 million tax returns filed in 2018, that 1.4 million of those returns accounted for 25% of taxes collected. The top 1%'s share of taxes was smaller in 2018 than in 2001, but 25% is still a full quarter of all income taxes paid. 

You might say, that’s cool. Maybe that 1% of taxpayers should have paid 30% of all income taxes. Or maybe you want them to pay even more. I can’t answer those questions. I can just point out that 1% of us paid 25% of the taxes.

Let’s go to the other side of the income scale. In 2018, the bottom 50% of all tax returns paid 3.4% of all taxes. Half of the all the returns paid 3.4% of the taxes. That isn’t zero but you could say that half the folks in the US basically paid almost none of the income taxes. Think of that. Of those 143 million returns, there were 71 million returns that paid almost nothing.

Put some of this above together. Of 143 million returns, 1.4 million of them paid 25% of all taxes and 71 million returns accounted for 3.4%. Subtracting, that means the remaining 70 million tax returns or 49% of all tax returns – people who were not super rich and people who were not among the bottom half, paid about 72% of all the taxes. Having average but not high income puts you in a group that is floating the US economy. Those 70 million taxpayers represented a little less than half of all taxpayers and paid approximately 72% of all income taxes paid.

Clearly, we already have a tax system wherein the bottom 50% of the population by income pay almost nothing in income taxes and receive a goodly share of the benefits of government. The remaining 50% of the population pay more than their share so that the bottom 50% get to pay little.

As I said above, you may believe that the above is not enough. I can’t influence that. I can wonder out loud when enough is enough. Higher income people are smart and mobile. At some point, if Biden gets too aggressive in raising taxes even more on higher income and mobile folks, he may find himself without people to pay. Then who is going to shoulder the main tax burden?