Some Taxing Questions About (Not So) Record Corporate Profits
One of the recurring memes of the now nearly 4 years old "bull market" (assuming the recession ended in June 2009 as the NBER has opined), is that corporate profits are soaring, and that despite recent weakness in Q4 earnings (profiled most recently here), have now surpassed 2007 highs on an "actual" basis. For purely optical, sell-side research purposes that is fine: after all one has to sell the myth that the US private sector has never been healthier which is why it has to immediately respond to demands that it not only repatriate the $1+ trillion in cash held overseas, but to hand it over to shareholders post-haste (see recent "sideshow" between David Einhorn and Apple). However, a problem emerges when trying to back this number into the inverse: or how much money the US government is receiving as a result of taxes levied on these supposedly record profits. The problem is that while back in the summer 2007, or when the last secular peak in corporate profitability hit, corporate taxes peaked at well over $30 billion per month based, the most recent such number shows corporate taxes barely scraping $20 billion per month!
Does this mean that when one excludes all the usual non-cash exclusions, and all the endlessly recurring non-recurring items, all of which which feed the EPS line from a GAAP, and non-GAAP basis, and focuses solely on actual earnings generated by US companies, which form the basis for tax accounting purposes, that the real profitability of the US private sector, and by implication, the S&P, is at best two thirds of where it was at its peak in 2007, and if so does this mean that the actual earnings multiple applied to true recurring earnings is some 50% higher than where the sellside brigade wants to retail investor to believe it is?
We don't know, but we do know that while Individual Income taxes have returned to their 2007 peak as per the latest quarterly Treasury Borrowing Advisory Committee presentation (blue line chart below), Corporate Taxes still have some 50% to go before the prior peak is regained (green line).
There is also another explanation. US Companies have built up their massive cash hoards over the past 5 years due to an even more aggressive pursuit of tax shelter and loophole strategies, as well as an even more aggressive use of deferred tax assets and NOL carryforwards, meaning that all the cash that they have not paid to the US government, has ended up on their balance sheet, and which cash shareholders are now demanding be dividended or used to fund buybacks (preferably with leverage).
While the first explanation is relevant from a valuation standpoint, implying that corporate profitability is far lower than conventional wisdom believes to be the case and thus the market is widely overvalued, the second explanation goes straight to the most sensitive issue facing the administration currently: namely deficit reduction. Because while the administration does everything to "close the spending hole" by hiking income taxes on the wealthiest, what happened to any discussion about corporate taxes especially on those megacorps who pay zero domestic taxes and barely any tax in offshore shelters like Ireland, the Netherlands or the Caymans?
Because something tells us if indeed Corporations are rolling in record profits, they should at least be paying the same amount of taxes as they did during the last credit and housing bubble, instead of 66% of it.
Finally: if corporations were to simply catch up to where tax payments were in the summer of 2007, this would imply an annualized government tax revenue difference of some $120 billion. While hardly a massive sum in the context of the US $1+ trillion deficits, it would take some pressure off the US consumers, be they rich or poor, and actually stimulate the one driver that at last check still accounted for some 70% of US GDP: consumption.
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