Corporate Income Tax: Too Much or Too Little

The last few days, there has been much reporting on the bi-partisan group of 100 in Congress that has encouraged the Super Committee to "go big" in looking for debt reduction ideas.  Maybe they read my 8/22/11 posting on this subject!  Since I raised the point of Corporate and Individual income tax receipts at the end of my 8/17/11 posting "Best and Worst Presidents Relative to Debt Growth", I wanted to look into this a bit deeper since the 100 have recommended a "balanced approach".  Balance has been reported as needing to include increased tax receipts which I want to now investigate.

Again, using the historical spending reported in the OMB 2012 Budget, there are two striking graphs on Government Receipts as a Percent of GDP that caught my eye.



As you can see, Individual Income Tax Receipts as a Percent of GDP rose dramatically in 1944 from around 1% to 7.3% during the war and then remained relatively flat at 8% level.  Since 1944, the top Individual Tax Rate steadily dropped from 94% to the current 35%.  The lowest Individual Rates went from 23% in 1944 and bounced around until hitting the current rate of 10% in 2002.  In spite of these reductions, the ratio of has remained around 8%.  However, the Corporate Tax shows a very different picture.

As with Individual Tax Receipts, the Corporate Tax Receipts as a Percent of GDP rose in 1944 from about 1% to near 5% during the war.  In 1951 it bumped up to 6% but then began a steady decline over the next 30 years down to a stable average near 1.8%.  The top  Corporate Tax Rates over this timeframe went from 53% to the current 15% while the lowest rates went from 29% to 15%.  (The Effective Corporate Tax Rate is near 13% which is 5th lowest among OECD countries, as reported by the US Department of Treasury based on an average from 2000 to 2005.)

Since the Corporate rates dropped less than for Individual rates but the Corporate Receipts as a Percent of GDP dropped while Individuals did not, it must mean that Corporations started making much less profit while individual incomes must have risen relative to GDP from 1950 to 1980!  This does not seem plausible!  So another explanation is that Corporations began to get many more tax breaks (loopholes?) than Individuals did.  Therefore, the news reports of taking away tax loopholes for corporations could be an appropriate way to increase  Government Receipts, especially if this were to return the Corporate Tax Receipts as a Percent of GDP back to the post war level of 5% - 6%.  This would be an increase of receipts of 3.5% of GDP which would help reduce the annual deficit by $500B / year or $5 Trillion over the next 10 years in the ballpark the Super Committee has been asked to deliver by the 100.

But another side of the debate has been how high the current Corporate Tax Rates are relative to the rest of the world.  It is true, that with federal, state and local included, the Corporate Rate in the US the second highest, behind Japan.  However, Corporate Tax Receipts as a percent of GDP in the US are the SECOND LOWEST of the OECD countries.  The lower tax rate countries have closed tax loopholes in their countries while we have created them!  To be precise, as reported by the Government Accountability Office, tax loopholes, deductions, credits and subsidies reduced tax reciepts in 2010 by $1 Trillion for both Corporate and Individuals.  So it seems that the Corporate Loopholes are about half of this $1 Trillion total.

For reference, in 2009, here is the US ranking (highest tax is a high rank) among the OECD countries in taxes as a percent of GDP:

Total Taxes: 26 out of 28  (second lowest) Note: Taxed Enough Already......don't think so!
All Income Taxes: 19 out of 29
Personal Income Taxes: 15 out of 26
Corporate Income Taxes: 25 out of 26 (second lowest)
Social Insurance Taxes: 18 out of 28
Consumption Taxes: 29 out of 29 (lowest)
Property and Wealth Tax: 4 out of 28 (fourth highest)

All of this information seems to support that we, as a nation, should be able to afford an increase in taxes to Corporations and even Consumption (Sales Tax Plans!).

Social Security Disability Fund is Going Broke Too

The news media is reporting today that the Social Security Disability Fund will go broke in 2017 due to the sudden increase in claims by people disabled and out of work.  Sorry to say, that this is NOT new news!  The 2012 Budget estimates projected this same catastrophe months ago, but it is only making the news now.  Here is the forecast of the Social Security Disability Trust Fund Balance through 2018, when it was forecasted to be a negative balance.

As you can see, the Disability Trust Fund started shrinking at a rapid pace starting in 2008, so the crisis in this Trust Fund started three years ago.
The news today reported that claims are exptected to rise by as much as 50%.  Should this occur through 2012, this fund will go negative in 2012!  Why is this important to us??  Last time the Disability Trust was in trouble, is was rescued by the Social Security Trust Fund.  In my post of May 23, 2011 titled "Social Security and Medicare Cost per Person", I projected the Social Security Trust Fund would last through 2050.  The fact that payroll taxes have been cut for 2011 and likely through 2012, will certainly change this 2050 date, but it appears that Social Security supporting the Disability Fund is a low risk option in the short term.  However, now this makes me want to update my Social Security and Medicare cost per person forecasts based on the low GDP growth expected over the next several years.

Best and Worst Presidents for the Economy

After publishing my previous post titled "Best and Worst Presidents Relative to Debt Growth" (8/17/2011), my long held beliefs were rattled.  So I decided to dig a bit deeper into the Government Data on the economy, specifically the GDP.  In my investigation and analysis, I had noticed GDP numbers that I could not reconcile.  I finally found the problem when I got to the Bureau of Economic Analysis.  http://www.bea.gov/national/nipaweb/SelectTable.asp?Popular=Y

 The bottom line is that two GDP numbers are used.  The GDP (sometimes "nominal"GDP) is the value of Goods and Services, priced using each year's (or quarter's) actual prices.  The Real GDP is calculated using a constant price for all years, essentially removing the effect of inflation.  When a percentage change is calculated on Real GDP, it reflects the real growth in economic output by removing "growth" due to price inflation.  Said another way, Real GDP is the actual volume of goods and services produced during any period.  A high GDP growth driven by high inflation would not necessarily be a job creating economy.  However, a high growth of Real GDP is more likely to create jobs since additional goods and services are being produced.

So I decided to look at the same Presidential Terms as were analyzed in my previous post, but this time with a focus on GDP compound growth both Real and Nominal.  As an example of the technique, below are two graphs for Reagan's Term on GDP Growth and Real GDP Growth (these graphs are described in my previous post).

The table below summarizes the results for all Presidential Terms.  Included is a column for the first 10 Quarters of each Presidential Term so that Obama's Term to Date results can also be included. 

As you can see, the lowest GDP and Real GDP growth rates occur on Republican Terms and the highest are during Democratic Terms.  This led me to calculate an average for all Democratic Terms and all Republican Terms.  (Each average has a single term President).  Again, the Democrats have done better in all categories when it come to Economic growth and, by inference from Real GDP, job growth as well.  All this data is really getting me to rethink my political affiliation!

Best and Worst Presidents Relative to Debt Growth

So much talk about the Debt lately is making my head spin and my previous posts have just created more questions.  I decided to look at the COMPOUND ANNUAL GROWTH of the National Debt under each President to see how they did.  This approach does not "punish" a President for what they inherited, but what happened after they took office.  I used Presidential terms from the inauguration year to their last full year and I put Kennedy/Johnson together as a term and likewise for Nixon/Ford.  I also generated numbers for Obama with only 2 years completed and his third year estimated, but I will present these only in comparison to the other's results.

I also evaluated each President on the GDP Growth as well as the components of Debt: Receipts (including Individual and Corporate Taxes), Outlays, Deficit, and Supplemental.  As for "good" or "bad" evaluations, I am assuming higher Receipts is good and lower Outlays are good which lowers the deficit and the debt.  I recognize that certain political philosophies may not support these being "good".

The President with the highest growth rate on Debt was Ronald Reagan, yes Reagan!  He also had the highest growth rate in Supplemental spending.  Obama would have come in second to Reagan if we used his 2+ year performance.  Below is Reagan's Debt growth rate of 15.1% followed by his Supplemental growth of 46.6%



The highest growth rate of yearly deficits occurred under Bush 2 at 63.8%.  The Obama growth over the 2+ years is 6.3%.  Below is the Bush 2 graph for Deficits.

To summarize all this data, I created a table of all the contributors to Debt: Receipts, Outlays, Deficit, Supplemental Spending, Debt and GDP.  Then identified the 2 highest growth rates and the 2 lowest growth rates and assigned a point each time a President's term appeared.  Again, I used high Receipt growth and low Outlay growth as "good" and of course the converse as "bad".

The two highest point totals for "Best Debt Presidents" are: Clinton and Carter, each with 5 points.  The next highest had 2 points.

The two highest point totals for "Worst Debt Presidents" are: Bush 1 with 5 points; Bush 2 and Nixon/Ford each had 4 points.  The next highest had 2 points.   This suggests that the Republicans are "worse" for our Debt while Democrats are "good" for our Debt.  Isn't that a switch??

To note: Clinton and Carter both had higher GDP growth rates than Bush 1 or Bush 2 (5.8%, 11.2%, 4.8%, 5.4% respectively.  I thought Republicans were "good" for the economy??

  The entire table follows, including the Obama number for his 2+ years for compaison.  Had Obama's term been included, there would be NO Change in the "Best" Presidents, but Obama would have replaced Bush 2 in "Worst" Presidents with all of them getting 4 points.

A few more comments on the internals:

• Carter and Clinton had the highest growth rates on Individual Income Taxes (16.1% and 10.4%) while the highest growth in Corporate Income Tax was during Bush 2 and Reagan (16.5% and 9.2%).  I would have expected all these to occur during the strongest ecomonies, or highest GDP growth but they did not.  Who is business friendly again??  Who is looking out for the average american again??
• Payroll tax (Social Security and Medicare) grew 3.0% faster than Individual Income Tax growth until 1990 when the Payroll Tax Rate shrank 3.8% faster.  There have not been any Payroll tax increases since 1990.  (Remember payroll taxes have been decreased recently while our trust funds are going bankrupt)
• Only Clinton and Carter had Receipt growth higher than GDP growth by 1.3%. (Higher Taxes??)  All other Presidents had Receipt growth LOWER than GDP growth.  Shouldn't the government benefit from a good economy?
• Government spending grew on average (per 8 year term) by 6.8% for Republicans and 5.1% for Democrats.  I thought Democrats were the ones who grew the government??

What this is beginning to tell me is that political ideology may get them votes, but the results they promise (or degraded to the other) is not supported by the facts and data.  Someone tell me if you hear or see any media outlets telling you this kind of information!!  Rather than driving a wedge between the Parties with rhetoric, maybe, with data, we could see they have much more in common in practice.



The Super Committee Needs to Update the Budget / Debt Assumptions

Although the 12 members of the "Super Committee" have now been chosen, I was reading an AP article this week by Alan Fram titled "Latest Picks for the Debt Panel Spark Some Pessimism" several comments caught my eye and triggered some other thoughts about the National Debt and the 2012 Budget.  [Doesn't the term Debt Panel sound very familiar to the Death Panel in prior news reports]
http://denver.xfinity.comcast.net/articles/news-general/20110809/US.Debt.Super.Committee/ 
In this article and throughout the news, the phrase of "trimming $1.5 trillion in debt over the next decade" clearly is the challenge to this 12 member committee.  But how misleading are these phrases.  In truth, the panel's only requirement is to reduce the growth of the debt over the next decade, NOT to trim $1.5T from the current debt!  Just to be clear let me state some basic facts about the debt and the 2012 US Budget.

• The current National Debt is $14.5 Trillion
• The estimated 2011 Government Receipts are $2.17 Trillion, with Outlays of $3.77 Trillion for a 2011 Deficit of $1.60 Trillion
• Over the next 10 years, to 2021, Government Receipts total $37.93 Trillion with Outlays of $47.32 Trillion for an 10 year deficit of $9.39 Trillion.
• This creates a National Debt in 2021 of $24.86 Trillion.  Remember that this does not include any Supplemental Spending which I discussed in my posting 3/10/2011 titled "Annual Deficits and the National Debt"
• Over the past 10 years, through 2010, Supplemental Spending totaled $3.45 Trillion which could therefore, increase the 2021 National Debt to $28.31 Trillion!
• So the job of this "Committee" is to reduce the 2021 Debt to $23.36 Trillion (or $26.81T if you add supplemental spending).  Again for reference, the current Debt is $14.5T.
• This will only reduce the Growth of the Debt from 4.85% to 4.21% compounded annually. 

For those who have interest in the source of this data, most comes from Table S-3, of the Summary Tables on the following link: http://www.whitehouse.gov/omb/budget/Overview and the historical numbers come from this same link and click "Historical Tables".

Now with this background estabished, how could a slight reduction in the debt be achieved by the committee.  I would start by looking at the big ticket items in the budget which many of you may know already, but there was one surprise for me.  And also note that Non-security discretionary spending represents only 9.9% of all outlays over the next 10 years!

National Defense is the largest and is part of the Discretionary or Appropriated Programs.  The total Discretionary budget over these 10 years is $14.14 T of which Defense is 2/3's.  So, a 10% reduction over these 10 years would just about do it!  Skipping Social Security for a moment, the next largest, is Income Security.  This includes Federal Employee Retirement, Unemployment Compensation, but also includes Housing Assistance, Food/Nutrition Assistance, and Other.  Putting a 10% reduction on just part of this area would easily obtain the other $.10 T.  JOB DONE!

But lets get real in the context of the current politics, current economic conditions, S&P downgrade and the requirement of a Balanced Budget Ammendment vote. The Democrats want to maintain all the social programs and the Republicans want to be revenue neutral.  In the paragraph above, you can see that is quite possible.

But we must now put the entire 2012 Budget up against the current economic realities.  What ecomonic assumptions are built into the Budget?  GDP growth is forecasted to be 5.1% compounded annually for these 10 years as you can see below.

Looking at the previous 20 years from 1988 to 2008 (Great Recession), the compound GDP growth was 5.4%.

 Many financial experts are now forecasting that US GDP growth will more likely be in the 2 - 3% range in the new global ecomony.  This certainly will have some effect on the predcited Goverment Receipts, especially Income Tax Receipts.  Below is the Individual Income Tax forecast in the Budget.

So the Budget is assuming a 9.7% compound growth in Income Tax collected when the GDP budgeted growth is only 5.1%!  Has the tax growth been this high recently?  In the chart below, the same period from 1988 to 2008 is evaluated.

As you can see, the compound growth over these 20 years is only 5.4%, which is very close to the GDP growth.  Seems the budget is a bit agressive on these assumptions, and it is much the same for Corporate Income Tax.  But, what would happen over these 10 years if the Government Receipt growth was much lower?  Of course it would add to the future deficits and debt!  But how much?  If we grew total Receipts at only 5%, this would add an additional $9.22 T to the debt.  If Receipts grew at only 3%, the debt would increase by $12.22 T! 

Putting this all together, how does the country look in 2021, assuming 3% GDP growth, 5% growth in Tax Receipts (agressive), no new taxes, and an additional  $1.5 T deficit reduction by the committee (plus the $.8T already done, gives $2.3T).  This would produce a National Debt in 2021 of

$31.78 T (assuming no Supplemental Spending).  If we held the Publicly held debt around 70%, it would produce a Net Government Debt of 111% of GDP.  For reference, currently we are 72%, Greece is 152%, Ireland is 95%, Italy is 101% and Japan is 128%.  For the US to stay at our 72%, the Super Committee would need to find an additional $7.80 T in spending cuts! 

Lets try to quantify this $7.8T in what this would mean in spending cuts based on the current 2012 Budget spending.

1. Cut All Discretionary Spending (Security and non-Security) by 55%
2. Eliminate Social Security, Medicare and Medicaid (Including Receipts)
3. Cut all Non Security Discretionary and Medicaid Spending

I don't think this will ever happen!  So what about Revenue.  You could recover this $7.8 T if you DOUBLED the taxes on the top 20% of wage earners which is also very unlikely.  Soooooo, it seems to me that the committee WILL have to have a balanced approach of both increasing Revenue and cutting Outlays in spite of the politics.  And oh by the way, we have to vote on a Balanced Budget Ammendment being pushed by the same group that does not want to increase Revenue.  This will obviously cause a combination of 1, 2 and 3 above which throws grandma under the train full of the sick and non-working driven by a terrorist!!

US Corporations Survive the "Great Recession"

The recession has been often in the news with concerns about economic recovery.  Although the "average person" (see previous post) probably has not yet seen much in the way of recovery, US Corporations never really felt the great recession!  If you are surprised, read on......

To make this assessment, I used a database of 88 US Corporations' Revenue and Earnings per Share (EPS) which were obtained from their SEC filings on a quarterly basis (10Q Filing).  Some companies are from the NASDAQ and some from NYSE, with most sectors being covered.  To see a complete listing of these check out my website and the tab "Examples" http://sustainthegain.com/examples.asp?page_id=mod_companies_list 

In addition to the SEC Filings, most companies also create a Quarterly Earnings Release, where using Index vs Year Ago, they try to explain the most recent results.  I always wondered if any of their conclusions could be supported with sound statistical analysis of this same data.  This curiosity led me to create this database for my statistical analysis of their Revenue and Earnings.  We all know that these results vary from quarter to quarter, but the important question is: "Is the most recent quarter STATISTICALLY DIFFERENT from the preceeding quarters.  If Revenue is up 3% from the same quarter of the previous year, the company leadership will tell you all the great things they have been doing to create this improvement.  Likewise, if Earnings are down 5% from the same quarter a year ago, those same leaders will be happy to explain what misfortune has befallen them beyond their control.  Never have they done the simple task of determining if this 3% up or 5% down is statically relevant, because only then is an explanation needed and meaningful. With this a backdrop, lets get on to the "Great Recession".

Most experts agree that the current Recession began 12/07 or 1/08.  I fit an exponential growth line to the quarterly data of either Revenue or Earnings per Share (EPS) to determine if the result was experiencing "steady" growth.  I also established plus/minus 3 sigma boundaries for this best fit line to determine if any one quarter fell outside these statistical boundaries.   But the most important assessment of these graphs is to find 7 or more quarters in a row above or below the best fit growth line as this determines if there has been a SYSTEMIC change in performance, rather than a single and unsustainable "bump".  To assess if any of these 88 companies were systemically impacted by the current recession, I determined if  7 or more results in a row were below the best fit growth line beginning 12/07 or later.  Since each company has two reported results, Revenue and EPS, there are 176 results that were evaluated.

In the 6 years prior to 12/07, 36.4% of these 176 financial results showed a systemic drop in performance.  Since 12/07, 40.3% of these results showed a drop, which is not statistically different from the 36.4%!!  SO, NO CHANGE IN FINANCIAL PERFORMANCE DURING THE RECESSION.  In fact, 18% of these 88 companies showed systemically better results during the recession!

Let me show you some examples.  First, is Amazon that showed no change in Revenue or EPS performance during the recession.

As you can see, the Compound Annual Growth Rate (CAGR) of 29.0% for Revenue has not changed since 2003.  The variation has increase along with the actual values, but the growth has been consistent.

Likewise for EPS, the CAGR of 29.1% is also unchanged since 2003.  Notice that there was one quarter of Jan 05 that was uniquely high and does require an explanation.  Otherwise the conclusion you reach is that Amazon is well organized to grow 29.1% EPS with no single quarter being better or worse than another since Jan 05.

McDonald's is a case of both Revenue and EPS being systemically hurt during the recession.  To know if the recession caused this systemic change would require additional study, but be assured that in their Quarterly Earnings Release, the recession is front and center in their explanation!

As you can see, the quarters after 12/08 are all running below the previous best fit growth line of 7.5% (the green line).  Although the actual revenue numbers got smaller, the CAGR during the recession is still 6.8% but a systemic drop none the less.

In the case of EPS for McDonald's, the systemic drop occurred 12/08 as with Revenue, and the current CAGR is a healthy 14.9% with slightly less variation than prior to the recession.

Delta Airlines is an interesting example since their results have gotten better during the recession.

Delta Revenue systemically rose on 12/08 and the CAGR increased as well to 9.7%.  Remembering Delta bought Northwest Airlines, the combined Revenue began being reported 5/07, but the statistical, systemic shift did not happen until 12/08, 6 quarters later.  To be clear, the recession did not HURT them!

EPS is not complicated by the merger of financials with Northwest, but you can see that a run of 11 quarters above the historical average (green line) began in 7/07, shortly after the combined financials. However, the last 8 quarters all are above the Upper Limit (blue line) which might indicate that the EPS got stronger 6/08, during the recession.

Looking at this same data by sector, Healthcare and Financials both showed statistically more "help" during the recession than all the other sectors.  To note, Healthcare also show less "hurt" during the recession than the other sectors.  Think of the sectors "helped" by Government stimulus!  Consumer non-cyclical also showed less "hurt" and more "help" during the recession as well without Government support.

Bottom line, the recession has not changed the financial performance of the 88 companies that I track.  The percent of Revenue and EPS results that went down prior to the recession is the same as these results that went down during the recession.  A conclusion you might reach from these data is that Revenue and EPS productivity went up during the recession as unemployment went up.  Can this level of productivity be sustained into the future or will these companies begin to hire again soon?

Were US Businesses Affected by the "Great Recession"?

I have been working on downloading SEC filings of about 85 US Companines and then statistically analyzing these quarterly results to see if during 2008, either their Revenue or Earnings were affected negatively.  I did a similar analysis after the 2001 terrorist attack to see who was negatively impacted.  For example, several of the airlines were already in decline prior to this event, however they wasted no time in blaming poor business performance soley on 9/11!

I have only gotten through the "A's", which is 12 companies (24 business results with Revenue and Earnings).  Of these 15 of the 24 results were unaffected or improved during 2008 with one company having results dropping off in 2007.  However, you can bet that Quarterly Earnings Releases are full of the difficulties confronting them during 2008 and beyond! 

Hope to have the other 70 companies finished soon, so come back in a couple of weeks.