Some Taxing Questions About (Not So) Record Corporate Profits

Tyler Durden's picture

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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CrashisOptimistic's picture

Note from the article that individual income taxes have recovered.  Corp tax has not -- and I offer a reason why.

Population growth for individual tax.  Pretty straightforward reason of how it can recover with economy not recovering.

For corps, you had it right earlier.  Bogus GAAP and non GAAP special items.  All BS.

Say What Again's picture

I've always wondered why corporations will use one set of numbers (we made a boatload of money) when talking to the street, and a different number (we made just a little bit of money when you count in all the other shit) when reporting taxes.  It seems to me that if the same number was used for both reports, then things would be much more balanced.

BTW -- I know why they don't use the same number.  It was a rhetorical question.

suteibu's picture

That just makes too much sense and closes the door on a whole host of corruptions. 

Eireann go Brach's picture

How funny is this headline. Tyler should use this as the humor for the day!

Spain Is the ‘Next Germany’: Morgan Stanley

kchrisc's picture

Propaganda channel does comedy. Or is comedic propaganda?!


mumbo_jumbo's picture

isn't the participation rate more important than population growth? who cares about many people there are as only ones with jobs pay taxes....just sayin.

smartstrike's picture

It really makes no sense! How is it possible for Individual Income Tax  Receipts to equal peak collections of 2007? With lower labor participation rate, higher unemployment and declining wages, how is possible?

The only possible explanations are more individual taxpayers and/or rising average taxable wages. 

What we know is that most jobs that are being created pay less than the US Poverty level as evidenced by the rising SNAP participation rate.


game theory's picture

I wondered this same thing about these numbers.  But it is plausible that tax receipts can rise if, for example, many lower wage employees are laid off or fired and the remaining high-tax bracket employees give themselves raises.

CrashisOptimistic's picture

As I noted in the first comment, the world adds 1 billion people per decade.  The US was maybe 20 million.  6 years of it would be 12 million.

More people, more indiv tax rev.

hooligan2009's picture

what you are seeing is the effect of taxes paid by an increasing public sector (civil servants, army, police) in terms of pay and pensions.

what you don't see is the spending side of the equation that pays the salaries and pensions (that then pay the taxes).

krugman smoke and mirrors

hannah's picture

just go to ANY retail store and note that over the last couple years they have reduced rack space and if you dont have it to sell you CANT SELL IT. profits are way down for every company EXCEPT those living off the gov teet.

Son of Loki's picture

hannah, very true. I was wondering what is happening in Sears and JCPennys where you can play volleyball the floors are so empty.   Smaller and smaller inventory.  No shoppers.


Other wise the mall this weekend showed the usual several stores with a ominous black curtain hanging in the wondow where a Hallmark or some other bankrupt store folded.


If it weren't for all the teens hanging around the mall buying nothing, but just fighting, flirting and pushing each other around (their jeans sagging down below their hips showing off their filthy underwear), it would be pretty spooky empty.

NotApplicable's picture

They ran the kids off around here, so it's nothing but senior zoo. I bought tires at Sears a couple of weeks ago, and at 47, I was by far the youngest customer I saw.

djsmps's picture

Slightly off-topic, but I just saw this:


Pentagon creates new medal for cyber, drone wars WASHINGTON — Defense officials say the Pentagon is creating a new medal that can be awarded to troops who have a direct impact on combat operations, but do it from afar.

The Associated Press has learned that the new Distinguished Warfare Medal will be awarded to individuals for "extraordinary achievement" related to a military operation. Unlike other combat medals, it does not require the recipient risk his or her life.

The medal is a recognition of the evolving 21st Century warfare where troops fight wars from computers and video screens. The medal could go to service members who never set foot in a combat zone, but launch drone strikes or cyberattacks that can kill or disable an enemy.

Officials spoke on condition of anonymity because the announcement has not yet been made.

Will they also have "small-child clusters" for repeated acts of valor from afar?  Will the Purple Heart now be awarded for eye strain?


Canadian Dirtlump's picture

Apparently it is a bronzed piece of chicken shit.

hooligan2009's picture

in the shape of an erect penis and a new award called "masturbation of honor"?

NotApplicable's picture

So... it's Ender's Game with power-ups?

Achievement Unlocked!

MisterMousePotato's picture

This is the third reference I have seen in the last month to an obscure book I read, oh, it musta been twenty years ago? What is going on with Mr. Card?

kchrisc's picture

How many children does one have to kill to get the "small-child cluster?"

"I took out a school and 68 children, and all I got was this metal and only 2 small-child clusters."


Colonel Walter E Kurtz's picture

If this graph is all corporation taxes, meaning from both large and small corporations, I would guess the difference might might come from the small corporations. I would guess all the small corporations have been much less profitable (if profitable at all).

If my personal business is any indicator, the massive losses we suffered the last few years get to be carried forward. If we continue to scrape by and actually make a profit, it is going to be a while before we owe any meaningful amount of taxes.

Then again, who knows what the rules will be next week. Got to love the new normal!


hooligan2009's picture

the sad thing is that i believe you would be making a profit if the big corporations weren't guilty of tax evasion and fraud.

Colonel Walter E Kurtz's picture

Thanks...but the real sad thing is we would be making a profit if the small "so called" businesses were not cheating. Hard to compete with "employees" when most of your competitors use independent 1099 workers to do the work. Just too damn many of these companies nowadays playing the game for the feds to keep up with all of them. When one of them finally gets examined and then promptly goes out of business, the next one springs up the following week to take their place. It is discouraging to then start seeing all the tax liens that then get filed the following couple of months against these defunct so called companies.

But I have hope, the Feds/politicans will eventually just issue more laws and regulations and will solve the problem! /sarc on


MachoMan's picture

The concept of employment is over...  from big businesses to little, everyone is going to be a contractor...  obviously some industries are more conducive than others to this sort of conversion, but every category that is so situated is balls deep in the transformation towards a contractor labor force.

What hasn't happened, yet, is the repurcussions to personal income tax collections...  In short, contractors will be able to deduct far more expenses than they used to be able to deduct as employees and, further, perform work on the side that's under the table [everyone doesn't give a 1099].  There are also some obvious ways around portions of self employment tax...

hooligan2009's picture

everyone is going to be a robot..or a drone pilot.

DaveyJones's picture

and colonel, just like the small banks, this is obviously all your fault. Please pay higher insurance fees and provide more bailout money

Colonel Walter E Kurtz's picture

I know.

Everyday I get up and tell myself, it is all my fault. Every morning i am giddy with the anticipation that I get to work another day for Big Brother and TPTB. I love putting in 80 hours per week, putting all my capital at risk, just so that bureaucrats can try to regulate me to death, telling me all I do is take advantage of my fellow citizens. I love having to collect taxes from the workers, filling out endless forms and submitting the taxes to all my city, state, county and federal government benefactors so that they do not have to try to collect the taxes individually.

I realize I would have no life without my overlords. I sincerely promise to continue to be a good gubermint serf.



Jafo's picture

The IRS had its budget slashed because they decided to go after people that were politically connected.  Since the budget cuts they have been relying upon companies to report honestly.  As we say in the trade"Fat chance of that happening".

Small companies are not supposed to make a profit of any significance after taking into account all the costs and overheads that have to be met.  This includes the disguised payments to the directors/shareholders above their nominal wages.  Short staffed revenue authorities cannot hope to ever police these liberties taken with the truth.  As a matter of fact, small losses are the norm for these companies.

These days the big companies are getting away with something similar although they often need to resort to parking the untaxed profits in off shore entities. There is a limit for the large listed companies as the shareholders could revolt if there were no dividends or if the dividends were too low.

The US Treasury must be going spare about this.  The only solution is to engineer a culture change in the IRS and then restore funding to a level adequate to deal with the problem.  While the politicians bear the IRS a grudge that will be no small task.

Mercury's picture

Since 2006 the P/E on the S&P 500 is now at the low point while P/EBITDA is at a peak.

This could be explained by tax evasion but also by lower capital expenditure (all that cash on balance sheets) and debt/service. All likely suspects but I would think that lower debt and debt service is still the biggest factor here.

hooligan2009's picture

most excellent article and a great piece of forensic analysis.

i beleive that exploiting tax loopholes (tax evasion) is the norm for the majority of US companies who are intent on impoverishing the US economy by not paying the legislated for tax rate and paying non-US employees far less than their US counterparts.

the analysis of tax paid IS the bottom line. the rest is bullshit, good will and as you say sell side hype.

it is my contention that international companies, along with accounting firms (such as PWC) and banks have formed a conspiracy to defraud the us tax payer of hundred of billions. if you extend the xample you have given to the last 40 years and the next twenty years you can see the extent of corruption amongst this cabal of vipers is costing not billions, but trillions of dollars

cui bo·no 

 (kw bn)
Utility, advantage, or self-interest considered as the determinant of value or motivation.

DaveyJones's picture

like the growth and complexity of the finance industry, the same qualities in tax indicate a corrupt and dying empire

MachoMan's picture

This is nonsense...  If you do not have a legal obligation to pay a tax, then you can't be said to be involved in a conspiracy to avoid it.

You don't have a problem with the companies per se, you have a problem with the laws on the books and the enforcement thereof.  Look at it another way, the same concept applies to personal tax payers...  Do YOU (and everyone else) take all the deductions you're entitled to?  Avoid income recognition to the furthest extent possible?  The only difference between companies and individuals is the size of the numbers involved...  [and don't give me any shit about how small fry taxpayers don't have the resources to hire tax professionals]   

hooligan2009's picture

no shit here..

I agree that in the eyes of the law (e.g Federal Reserve Act, various gun laws, rape laws, plea bargaining, drug laws, prostitution laws, surveillance laws, wire tapping.. the list is endless) that those people who suck off the Fed teat, use fully automatic guns to protect drug shipments, legalize prostitution in some states and not in others, determine differing ages for consent (child molestation) with differing definitions of rape e.g. date rape..all can be interpreted in a strict or lenient way dependig on the quality of their representation and not their guilt or innocence. 

guilt or innocence these days is less relevant than it has been for decades as we wallow in the moral and financial bankruptcy of the political and legal system

I certainly do advocate that everyone, everywhere, as individuals should cease paying any tax whatsoever, immediately.

but then, I am also intolerant of sending money to a politician to spend on his or her defintion of welfare. war, propaganda and telling me precisely how I should act and behave. i advocate that the government stops spending any money whatsoever. 

on my own, my actions mean nothing whatsoever, hence the blog "action". 

i still hope (not pray any more since there is no religion with any clout or capability) that morals and ethics and "men of good standing" will return to all walks of life, including government rather than this cess pool of corruption and base standards we are filling as fast as credit can be thrown out the door at whatever pink elephant turns up with a case of wine.


Jason T's picture

Ask Bob Toll of Toll Brothers... homebuilders got the mother of all tax benefits from this crisis.  Effectivly, American's bailed out Bob Toll.

NotApplicable's picture

The only reason they not only survived, but profited during the melt-up.

They even got the taxes back they paid in the good times, if I recall.

MrBoompi's picture

We have to remember profitability is measured in fiat dollars.  If you want to measure growth you need to look at the number of "units" produced year over year as well as things like profit margins and overhead.  Inflation can make profits appear larger, even though it was simply due to price increases.



CrashisOptimistic's picture

You missed the point.  Taxes are paid in the same dollars.

The article is about how profit (measured in those dollars) can return to pre 2007 levels but taxes (also measured in those dollars) have not.


valkir's picture

OT,but maybe..not.A men burn himself to death in France.

JR's picture

 Profiteering is a two-way street. And “bountiful harvests” by some can lead to starvation for others.

“Food speculators like Goldman Sachs currently control 61% of the market for basic foods like wheat and corn, compared to 12% in 1996;” and “global food prices have doubled since 2003.” Here is the story by Keith Johnson in the American Freed Press.

Wall Street vultures drive up food prices while billions starve | February 9, 2013

While people around the globe struggled to put food on the table in 2012, banking giant Goldman Sachs reaped a bountiful harvest. According to a new report by the UK-based anti-poverty group, World Development Movement (WDM), Goldman Sachs made approximately $400M in profits last year by betting on the prices of food staples like wheat, corn and soy.

"Goldman Sachs is the global leader in a trade that is driving food prices up while nearly a billion people are hungry," says WDM campaigner Christine Haigh. "The bank lobbied for the financial deregulation that made it possible to pour billions into the commodity derivative markets, created the necessary financial instruments and is now raking in the profits. Speculation is fueling volatility and food price spikes, hurting people who struggle to afford food across the world."

The report goes on to conclude that the only thing that will stop banks from gambling on hunger is tough regulation, something that Wall Street is fiercely fighting against.

In 2011, the Goldman-Sachs-aligned International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association joined in a lawsuit against the United States Commodity Futures Trading Commission (CFTC). The purpose of the suit was to challenge a portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act that imposes limits on the number of contracts a trader can hold for 28 physical commodities, including wheat, corn, cotton and sugar.

On September 28, less than a month before the rules were set to take effect, Obama-appointed United States District Judge Robert Wilkins ruled in favor of the plaintiffs, saying that the CFTC had no "clear and unambiguous mandate" to set limits on speculative positions under the Dodd-Frank Act.

"The position limits rule is vacated and remanded to the commission for further proceedings consistent with this opinion," ruled Wilkins. In doing so, the judge single-handedly relegated the matter to a perpetual state of limbo and gave Wall Street speculators a license to continue manipulating the price of food.

Although other major investment banks like Morgan Stanley and Barclays Capital have also made a killing off food speculation, Goldman Sachs has the distinction of being the architect of this predatory practice.

"In 1991, Goldman bankers, led by their prescient president, Gary Cohn, came up with a new kind of investment product, a derivative that tracked 24 raw materials, from precious metals and energy to coffee, cocoa, cattle, corn, hogs, soy and wheat," wrote Frederick Kaufman in a recent article for Foreign Policy magazine. "They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known henceforth as the Goldman Sachs Commodity Index (GSCI).

"For just under a decade, the GSCI remained a relatively static investment vehicle, as bankers remained more interested in risk and collateralized debt than in anything that could be literally sown or reaped. Then, in 1999, the [CFTC] deregulated futures markets. All of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food." ...

Matt Taibbi of Rolling Stone magazine once famously described Goldman Sachs as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

Food speculators like Goldman Sachs currently control 61% of the market for basic foods like wheat and corn, compared to 12% in 1996. The resulting effects of this stranglehold cannot be understated. According to the UN's Food and Agricultural Organization (FAO) Food Price Index, which measures fluctuations in the cost of food, overall global food prices have doubled since 2003. Meanwhile, the FAO estimates that one out of every eight people in the world is chronically undernourished....

riphowardkatz's picture

Yes it is Goldman Sachs, not the government that bailed them out, not the federal reserve that has doubled the money supply not the fact that Goldman is too big to prosecute, not the fact that government subsidizes ethanol production, not the fact that government incentivizes mega corps that create no variation which ends up in mass crops failures. Its all Goldman

Good lord man. Open your eyese. Everything and I mean everything in this world that is wrong is caused by the immoral use of force by governments, take that away and Goldman IS GONE, POOF. 

JR's picture

I have awakened. And the scales have fallen from my eyes. I hope that you can experience this as well. Goldman Sachs is the government. It is a key owner of the Federal Reserve.

When the bankers control all three legs of the stool, the Federal Reserve, the judge and the regulators,  the only difficulty they have remaining is to try to whitewash the grand scam to make it look as good as they can.

What did the people expect when the public business was turned over to private banks; to these giant conglomerates that moved heaven and earth to gain this control?

They want the value of your money; they want your home; and, now, they want your food.

riphowardkatz's picture

Before explaining how weak you are I have a question then. Say you could wave a magic wand and goldman would go away. what you are saying is that instantly the world would be back on track and everything would be great? Dont stop at goldman either you can wave away JP morgan and any other TBTF bank.

Now that you hopefullly realize that the exact same disgusting entities would be back in a matter of months with different people at the helm and different names please  consider the following....

Roll over idiot. You have no control of your life. Go dig a hole and die in it. Your 3rd world mentality is an embarrasment to you. Thank goodness the founding fathers were not so weak. To think you are controled by a bunch of pin head bankers, what a miserable little life you lead.

For those that want real change for the better start advocating for the proper roll of government which is to prosecute force and fraud and provide a court system for adjudication of differences.

The proper roll  its not to decide on winners and losers, it is not redsitribute wealth, it is not to take from some to give to others.  Start understand there are only individual rights.

The good of all is faith based concept with no connection to reality. If you believe in the concept of the good of all prepare for someone to decide what that is and for you to not like it.

The problem is philosophical. Americans were sold a lie that The good of all exists. This was done by progressives in the early 1900's. It was done through univiersties which spread the ideas to media and from media to the people. The people then started to enact these ideas through government. Until the philosophy of enough Americans changes we will continue down a very bad path. Group think, sacrifice for the greater good, collectivism all leads to centralized control.


LongSoupLine's picture

It's called "Mark to Fuck you asshole".  Mark to Market and even fucking Mark to Makebelieve are fucking pipe dreams now.


Fuck you SEC, Congress and all you other fucking shit covered dick eating assholes for your corruptive crony policies.  That means you Rubin, you fuck.

Shizzmoney's picture

Corporations to Government, at gunpoint: "Mark it Zero, Donny. MARK IT ZERO!"

NotApplicable's picture

Would've also accepted "Mark to Fuck You, That's Why!"

Tombstone's picture

Stripping out the accounting fluff and hogwash, the PE is likely 50% higher on the S&P; about 20-22.  Whatever happened to reveunue-expenses=profit?  The accounting tricks used by corporate Amerika are bordering on the complexity of the mammoth tricks used by the IRS to confiscate wealth.

sitenine's picture

I often wonder if we will ever really know the extent of the lies, manipulations, and propaganda fed to us as gospel on a daily and continuous basis. We all know by now that as long as any greater fool still believes in the free market that there is an opportunity to make an advantage for ourselves to take that fools money. so why wouldn't we? There is a reason 'leaders' beat the 'level playing field' drum - reasonable folks can be turned into fools through repeated rhetoric, as simple as that. If corporate profits were really an issue, would we expect Amazon to atract buyers? Facebook? Apple? Likely not. A consumer society doesn't have to concern itself with such things for as long as resources are procured from elsewhere in exchange for paper promises anyway. 'Investment' decisions have become irrelevant to most individuals because they are simply 'invested' in some random retirement fund of some sort. Expectations remain grossly skewed because funds are propped up, levered, or ponzified garbage that not one in a million would understand. Bottom line is that over consumption leads to insolvency, and lies, manipulation, and propoganda are the only means of sustaining such blatant stupidity and greed. Has it ever been different? 

Shizzmoney's picture

Humanity's tombstone: “We didn't know what we were doing, except for all those people we labeled as buzz-kills, who tried again and again to warn us that we were on an path to inevitable self destruction”

tornado_watch's picture

Tax loss carry forwards are still pretty material; the government retained and in some case enhanced favorable tax treatments such as accelerated depreciation; corporates that were near dead and forced to write of tax assets selectively getting to add them back to offset new tax obligations; favorable settlements for most corps on past tax treatments; then of course the loopholes and deterioration in earnings quality where healthcare cos add-back litigation and recall risk, industrials add-back write downs on underperforming M&A, etc.

Earings are also earnings per share, and the float has been coming down. Combined with the number of corporates reporting a suprise decrease in their effective rates... And as per prior posts here on ZH, concentration of earnings growth in names notorious for tax avoidance and off-shoring of revenues (Apple, et al).

Your Creator's picture

The consumer pays most of the taxes levied against corporations. You buy their products, you pay the taxes.  Take off all the taxes levied against corporations and lower the prices of products. Hidden taxes my friends.  The leftist argument for taxes on corporations have you all suckered.

Joe Davola's picture

Think of all the accountants and tax attorneys that would put out of 'work'.