Corporate Taxes, Profits and Investment

It is notable that the Globe has run a major story today – on p.1, above the fold in the print edition – drawing attention to the fact that recent  corporate tax rate cuts have not produced an increase in real business investment.

It is interesting to note that corporate profits have rebounded very strongly in the recent recovery.

Following the recession of the early 1990s, it took until 1994 for corporate pre tax profits to regain the nominal level of 1989.

Corporate pre tax profits in the fourth quarter of 2010 were 11.2% of GDP, still shy of the high of 13.6% in 2008, but well above the recession low of 8.9% in the second quarter of 2009.

Total corporate pre tax profits rose by $50.6 Billion or by 38% from the bottom of the recession in the second quarter of 2009 to the fourth quarter of 2010. That is almost as much as the $53.1 Billion increase in total labour income over the same period.

Meanwhile, non residential business investment has risen by only 8.8% (measured in real terms) since the bottom of the recession.

Tax breaks targeted to companies which invest and create jobs will put profits to work more effectively than more across the board cuts to the corporate tax rate.

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