March 25, 2019
March 25, 2019
Data released Friday by the U.S. Treasury Department confirm that President Trump’s tax law has gutted the corporate income tax, despite claims by his supporters that the law’s corporate tax cuts would somehow pay for themselves. This should worry anyone who wants the government to function.
The new data confirm that tax collections are falling at a rate never seen during a period of economic growth. For the first five months of fiscal year 2019 (which began in October of 2018), corporate income tax net receipts are down 20 percent relative to fiscal year 2018.
This is particularly alarming because fiscal year 2018 saw the second-biggest corporate income tax downturn in recorded history. Corporate income tax collections fell by 31 percent, from $297 billion in fiscal year 2017 to $204 billion in fiscal year 2018, when the new law first came into effect.
The only other year in which the corporate income tax fell more precipitously was in 2009 at the depths of the great recession. Corporate tax revenue collapsed then because corporate profits themselves collapsed during the recession, whereas now corporate tax revenue is collapsing entirely because of a choice made by the president and his supporters in Congress.
The current collapse shouldn’t be remotely surprising to anyone who followed the passage of the so-called Tax Cuts and Jobs Act, which slashed the corporate tax rate from 35 to 21 percent, created a giant new tax break for capital investments, and failed to eliminate special breaks and loopholes that allow some corporations to pay nothing at all.
Every objective forecast has shown the new law to be a substantial revenue loser in both the short run and over time. But some of the new tax law’s most ardent advocates have insisted, without evidence, that the corporate cuts would pay for themselves in the form of economic growth. Their argument is that lower corporate taxes lead to a huge boost in investment and corporate profits and incomes, and taxes paid on additional profits and incomes will offset revenue lost as a result of the tax cuts.
The new data confirm that this couldn’t be further from the truth. The economy has, in fact, grown at a healthy clip since the tax law’s passage, due in part to the artificial stimulus of passing tax cuts during a period of sustained economic growth. But it was never likely that corporations, already enjoying massive profits and sitting on large piles of cash, were going to alter their investment behavior in the wake of the tax cut. In examining the decline in corporate tax collections, it’s important to note that it is coinciding with growth in corporate profits. The Congressional Budget Office’s most recent forecasts find 8 percent growth in corporate profits in 2018.
The new Treasury data certainly aren’t the only worrisome signs. The revelation that Amazon, one of the biggest and most profitable corporations in America, paid no federal income taxes on a record $11 billion in U.S. income last year was a strong signal that something is amiss. And other large and profitable companies have made the same zero-income tax disclosure. In an economy increasingly dominated by a handful of mega-corporations, the taxpaying behavior of these companies matters.
Amazon and other companies’ disclosures point us toward the remedy for the apparent failure of our corporate income tax: Congress needs to find the political will to examine and reform the many legal tax loopholes that the biggest companies are using to avoid paying income taxes. Doing so could help create a long-needed level playing field between the big companies that make their own rules and the smaller mom-and-pop companies that don’t have access to special tax breaks—and could also help restore the public’s confidence in our tax system and in our elected officials.