Your dad is wrong
- Americans have shown little ability to perceive prevailing tax rates in a historical context.
- By most measures, U.S. taxes are both historically low and globally competitive.
- Massive job creation is of little long-term importance considering a jobless future for all is around the corner.
Americans rarely tether their views on taxes to reality. For example, a recent Gallup poll found that 57 percent of Americans said that “they pay too much in federal income taxes.” There’s one weird thing about that: only 56 percent of Americans paid any federal income tax that year.
For many many people today, it seems that the paying of taxes in general constitutes a burdensome load. This is hardly a new phenomenon. Since the late 1950s, the number of Americans declaring that federal taxes were too high rarely dropped below 50 percent, despite wide fluctuations in tax rates.
Perhaps the oddest thing of all is that views on tax rates often run inverse to underlying tax rates—that is, as tax rates fall, the perceived burden often rises. For example, from 1955 to 1965, marginal tax rates were at 90 percent. The lowest bracket was roughly 20 percent.
What happened, by 1989, as the top bracket gradually fell to 30 percent and the bottom to 15 percent? Between 1969 and 1989, against the backdrop of falling federal tax rates for all brackets, Americans consistently showed the highest levels of “taxes are too high” sentiment in history.
To be fair, the complexity of taxes makes an accurate discussion of any single issue difficult. What about rising payroll taxes? How are estate taxes distributed? What about state and local payments? The further you dig, the less reliable the data is, especially on a comparable basis.
But the point isn’t that taxes should be higher or lower than their current rates; it just seems necessary to show that perceptions of tax rates have little to do with the reality of taxation. Perhaps the complexity of taxes is more of an issue than the underlying rates themselves.
At least on a federal basis—which collected $3.4 trillion of taxes in 2015, versus $1.6 trillion for states and just $560 billion for local governments—the overall tax burden has hardly changed since 1950, no matter how it’s broken up.
So what about American businesses? With persistent unemployment, many are calling for corporate tax cuts to boost job creation. With more capital, people argue, corporations can focus on hiring rather than supporting the IRS. After all, U.S. businesses pay the highest corporate taxes in the world.
There are a few problems with that argument.
One major issue is that nearly 70 percent of U.S. corporation pay zero federal taxes to begin with. How does that work? It’s the difference between marginal and effective tax rates.
Marginal rates can be considered the “sticker price.” It’s the maximum amount you could possibly pay. Effective tax rates include advantageous items like tax credits and net operating loss carryovers—not to mention that most dollars aren’t actually taxed at the marginal rate to begin with.
You may notice that less than 20 percent of “profitable large corporations” skirted federal taxes entirely. Are these job creators in waiting? The data suggests otherwise.
In 2016, the U.S. Government Accountability Office—an independent, nonpartisan agency that works for Congress—released a report describing exactly how much large, profitable American businesses pay in corporate taxes:
The statutory tax rate on net corporate income ranges from 15 to 35 percent, depending on the amount of income earned. For tax years 2008 to 2012, profitable large U.S. corporations paid, on average, U.S. federal income taxes amounting to about 14 percent of the pretax net income that they reported in their financial statements.
Note: The GAO’s calculation for effective corporate tax rates is lower than other estimates you may see because it excludes unprofitable corporations, which pay no taxes, from its analysis. Including those firms’ losses would reduce the total net income from which the average tax rate is calculated, and would not “accurately represent the tax rate on the profitable corporations that actually pay the tax,” the GAO said.
On an effective basis—the amount corporations actually pay in taxes—American businesses are competitive globally. Against its OECD rivals (other rich countries), the U.S. scores very well. In fact, the U.S. both taxes its corporations less and raises less in revenue from corporate taxes than its foreign competitors.
But let’s throw all of these arguments away. Let’s just say that taxes are too high for businesses. Let’s assume that if American corporations had a little extra cash that they’d hire more workers. Surely such a simple statement could hold true. Right?
This doesn’t seem to be the case, despite its historical prevalence.
Throughout much of history, wages have had a loose connection with corporate profits. General declines in profitability from 1950 to 2000 were accompanied by commensurate reductions in wages. The correlation wasn’t always felt in any given year, but the long-term direction remained constant.
Then, in the late 1990s, the great decoupling began. New technologies—from machine-learning software to the internet—disrupted the correlation between wages and profits. With rapidly rising productivity levels per worker, businesses simply needed fewer employees to survive and thrive. No longer were the wages of employees contingent on the underlying earnings of the employer.
Today, Federal Reserve Economic Data indicates that corporate profits after tax have never been higher. Meanwhile, wages have continued their century-long march downward. Higher profits no longer need to be shared with a business process (labor) that has a permanently decreasing importance.
Higher profits and lower expenses have pushed American businesses to post their best financial results in decades.
In 2016, the companies that constitute the S&P 500—the 500 largest U.S. companies—reported a total cash hoard of $1.45 trillion. That doesn’t even include financial companies (which are obligated to hold certain amounts of cash for regulatory purposes) or roughly $2 trillion stashed overseas, according to the New York Times. With cash levels at an all-time high, debt levels have fallen to multi-year lows.
So, with an average effective corporate tax rate of around 14 percent, what are American businesses doing with all this extra dough? Not hiring workers, but paying dividends to shareholders and buying stock. In 2015, publicly-traded U.S. companies paid more in dividends and share buybacks than they made from after-tax earnings.
U.S. companies are literally breaking the bank to pay out excess cash to shareholders against a backdrop of tepid employment numbers. More cash in their pockets is unlikely to solve the bigger, systemic issue: the secular decline of work.
In a study published by the Oxford Martin School, an estimated 47 percent of workers across 702 occupations are at “high risk of potential automation.” But this isn’t some predicted future event; it’s happening now.
Between 2000 and 2010, the U.S. lost roughly 5.6 million manufacturing jobs—a 30 percent decline. Manufacturing output, meanwhile, rose nearly 20 percent. Businesses simply don’t need to hire anymore to grow.
The Center for Business and Economic Research estimates that 85 percent of U.S. manufacturing job losses are attributable to technological change (automation), not onerous trade deals or high taxes. According to The Financial Times, “although there has been a steep decline in factory jobs, the manufacturing sector has become more productive and industrial output has been growing.”
Clearly, something bigger is happening besides fluctuations in tax rates. And it won’t just happen to manufacturing and blue-collar jobs. A jobless future for all is likely just around the corner.
- The Future of Work (and Your Identity) — I Like Charts
- Why Are Corporations Hoarding Trillions? — The New York Times Magazine
Labor Markets: A Theory of Trouble — The Economist
- Rise of the Robots: Technology and the Threat of a Jobless Future — Martin Ford
- The Truth About Trade — Foreign Affairs