Monday, September 01, 2008

Blood from the profit turnip 

I recall Thursday night laughing at the line in Senator Obama's acceptance speech:
Now, many of these plans will cost money, which is why I've laid out how I'll pay for every dime-- by closing corporate loopholes and tax havens that don't help America grow. But I will also go through the federal budget, line by line, eliminating programs that no longer work and making the ones we do need work better and cost less...
This is an old chestnut. "Waste and fraud" will pay for all his plans, plus some more corporate taxes. I guess he learned from Walter Mondale that announcing tax increases in an election is a dubious strategy.

Jim Hamilton breaks down the data on corporate taxes for us:

According to Table F.102 in the Federal Reserve's Flow of Funds Accounts, domestic nonfarm, nonfinancial corporate profits amounted to $1,037 billion in 2007. A third of that ($310 billion) is currently being paid as corporate profits taxes, and $487 billion is devoted to dividends, which are taxed directly as income of the shareholders. But doesn't that leave $240 billion sitting around doing nothing worthwhile?

Not exactly. Those same institutions also spent $460 billion on net fixed investment in 2007 ($1045 in gross investment minus $585 billion capital consumption allowance), which was financed by a combination of the $240 billion in retained earnings and corporate borrowing. If after-tax corporate profits were lower, the only way to have the same level of investment is with greater corporate borrowing. Recalling Menzie's recent picture on the empirical relation between the growth rates of corporate profits and investment, it seems unlikely that investment spending would remain the same if corporate profits were lower. And if it somehow did happen, I doubt that increased corporate indebtedness is a wise outcome to insist upon.

I've wanted to create a set of quizzes for non-economists to see if they have a vague idea of what various quantities are. How many people would answer correctly that corporate profits in America are less than 10% of GDP (actually less than 7%)? Now there's another trillion dollars in proprietor's income (the money made by unincorporated businesses -- it's the business income you report on your 1040), though that's not what I think Sen. Obama intends to say he's taxing. Maybe he is. Of the $12.2 trillion in national income, $7.88 trillion are in wages and compensation.

Hamilton notes that if you want to point to one number that drives the growth of the economy, it's net nonresidential fixed investment. As Senator Obama tries to extract more and more income from the corner of the economy that doesn't vote to pay off the ones that do, he would also reduce living standards for future generations.

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