Now that the Senate has passed big changes to the U.S. tax code, it may be worth considering a blasphemous question: Do corporations need a tax cut? The bill, which now must be reconciled with the House version, would permanently slash the corporate tax rate to 20 from 35 percent and temporarily lower individual taxes.
Given that just last week, stock market indexes soared to new all-time highs and the government reported that corporate profits are surging, it’s worth considering whether companies really need the extra help from Uncle Sam and if they were to get the gift of tax cuts, will those savings translate into economic or wage growth? According to the Economic Policy Institute, the answer is no to both questions.
The EPI analysis starts with the big picture, noting that between 1952 and 2015, companies have been doing quite well — profits as a share of GDP rose from 5.5 percent to 8.5 percent. Yet, contrary to their complaints about the US having a high corporate tax rate, the money that Uncle Sam collected from corporations (in the form of tax revenues) relative to GDP, plummeted—from 5.9 percent to 1.9 percent—during the same period. In other words, for more than 70 years, companies have been making more, but paying less in taxes.
If Republicans were to deliver corporate tax cuts, businesses are likely to see a big boost; EPI notes, “The idea that corporate rate cuts are a good strategy for boosting the incomes of low and middle-income families is misguided if not outright deceptive.”
Dow 24K: Meanwhile, the latest leg up in stocks has been widely attributable to the Republicans’ tax plans moving closer to fruition. Still, when the Dow pushed above 24,000 for the first time ever, it just didn’t feel quite as good as the early-bull market gains. Remember October 2009, when the Dow poked above 10,000 for the first time since the financial crisis (and after bottoming out at 6500 in March 2009)? At that time, the idea of crossing back above 10K was an important psychological marker-it was seen as proof that the worst of the financial crisis was behind us. Interestingly, the stock market lived up to its label as a leading indicator – it was way ahead of the economy.
In fact, GDP contracted by 2.8 percent in 2009; 6 million jobs vanished that year and the market would not bottom out until the beginning of 2010; and many underwater homeowners would not see relief for years to come. But stocks roared back from the lows because of a few factors: the economy averted disaster, companies cut costs by slashing jobs and spending; and the government/Federal Reserve injected trillions of dollars into the economy.
Compare that milestone to last week’s Dow 24K and it really feels like night and day. Maybe we have gotten a little fat, dumb and happy. After all, there have been five thousand-point milestones for the Dow in 2017.