What to do with Corporate Profits?

US corporate profit margins have never been higher. Lately it has been popular to point out that higher corporate profits have come at the expense of falling employee compensation, the graphs look like something of out Marxist propaganda poster. My guess is that this will change as the economy improves:  companies will invest more to satisfy greater demand, new intellectual property will spread to competition, and higher employment will increase labor's bargaining ability. 

But how do we speed this up? Because I fear that corporate investments have become not so much a place to investment money and earn dividends from their productivity, as much as a place to store wealth. As you can see below, undistributed corporate profits have never been higher.

The problem with corporations storing wealth is that it isn't nearly as good for most of us as investing in innovation and hiring employees. Some of retained earnings are socked away for tax reasons, some are the collection of high-tech companies that are past their innovative prime, but a lot of earnings are being used to buy back company stock. These stock buy backs sound good to shareholders and corporate executives, but it is a short-term maneuver that doesn't yield any long-term gain in production or profit.

As you can see below, corporate investment has increased from the depths of the recession, but it is still near historic lows. Government investment is low and declining, and household investment (usually in houses) is still pathetic.

Maybe we need to change our tax code to encourage corporations to either invest their earnings, or to pay out their profits in dividends. We could make dividend payments deductible from corporate profits, just as debt expense is deductible today. If corporate invest more, then great. If households get more dividends then that's good too because they will find a more active way to invest or spend their income than the corporations. Although in such as scenario dividend income must be taxed as ordinary income.

Comments

[JDM]

How about taxing them as much as we did during Eisenhower's presidency?

[Jack]

We do tax corporations as much as in the 50's....you (JDM) are thinking of individual tax rates (which few rich people actually paid because of the loopholes and legal tax dodges).
A major portion of those undistributed profits are un-repatriated profits. A sensible approach to a reduction of the tax on repatriated profits would bring in more tax revenue and also encourage domestic capital and human capital investment.

[Effem]

Corporate taxation (as a % of pre-tax profits) is near record lows. For starters, we should normalize that (way before we increase the burden on individuals, which is nowhere near record lows).

[Kent Willard]

Agreed. Corporate taxes are at post-war lows. Both the rates and the revenue as a percent of GDP are low. The US statutory corporate tax rate may be among the highest in the developed world, but the effective tax rate is about average because corporations are so good at evading. And they are so good at writing the tax laws for Congress.

Frankly, corporate tax collection is so pathetic that I sometimes think we should just give up it and tax some other way. Either that or pursue my crazy idea that we should ban tax discrimination. No special treatment for any industry, activity, investment, etc. Kind of an economic civil rights movement.

[Stelios Theoharidis]

They attempted a reduced tax on repatriation during the Bush II era and it was strikingly ineffective. From my understanding it generally resulted in corporate acquisitions. The restructuring had little net positive effect on unemployment and actually resulted in layoffs. Effective tax rates on corporations on the federal and state levels are at historic lows, not only because of transfer pricing and shopping for tax shelters, but also because of the rampant use of subsidies on the state level to entice corporations to relocate. Just because we have ineffective tax collection does not suggest we just drop the system altogether for some sort of alternative. However, it does suggest we would need serious political reform before any legitimate tax structure reform would ever happen. Otherwise tax reform would take the shape of whatever corporate lobbyists / revolving door types would likely pursue. Notwithstanding, I would like to see a carbon tax implemented and it could be an alternative to a corporate tax, with gradual increases in carbon taxes and concurrent decreases in corporate taxes.