Corporate Tax Receipts Plunge Far More Than Expected As Result Of New GOP Tax Law

Tax payments for big businesses are declining much faster than was initially anticipated due to Republican tax cuts, according to Politico. As we profiled earlier this year, this could provide significant ammunition for Democrats who are calling for corporate tax increases as a staple of many 2020 platforms.

The US Treasury says that they saw a 31% drop in corporate tax revenue last year. This is almost twice the decline that official budget forecasters had estimated. Receipts were projected to rebound this year, but so far they have only continue to fall. They are down by almost 9% this year, or $11 billion.

At the same time, business profits continue to rise and total corporate taxes are at the lowest level seen in more than 50 years.

And overall taxes paid by individuals under the new law are up so far this year by 3%, as a result of higher wages and salaries. Last year, tax payments by individuals were up 4%.

This drop comes despite Republicans like Treasury Secretary Steven Mnuchin claiming that the new law would pay for itself.

Democratic candidates like Elizabeth Warren have already made corporate taxes a staple of their newborn 2020 bids for president. House Ways and Means Chairman Richard Neal has also proposed hiking the corporate tax rate by 1% to help pay for expanded breaks for low and middle income individuals.

Government analysts are dumbfounded by the decline in corporate tax payments. Big surprise.

Some theories they have come up with include businesses making wider use of the law's expanded breaks for business investments and an unexpected side effect of the ongoing trade wars.

Kyle Pomerleau, chief economist at the Tax Foundation said:

 “I don’t think any of us can point to something specific and say this is definitely what’s going on.”

In April 2018, the non-partisan CBO predicted that corporate receipts would drop 18%, to $243 billion, from 2017. However, payments actually came in at $205 billion, lower by nearly 1/3 from the previous year.

In January of this year, the CBO projected receipts would bounce back, increasing by 20%, or $40 billion. Through last month, they were down 8.7%. And the CBO also says it doesn’t know what’s going on.

The agency said: 

“Weakness in corporate tax collections goes beyond that which can be explained by currently available data on business activity.”

The organization also says that companies shifted deductible expenses, like funding for workers' pensions, into 2017 when the corporate rate was still 35%, because it made the deductions worth more. This would still show up in the government's data for 2018.

And there have been other predictions:

Companies may be making greater use of so-called expensing, an incentive that allows them to immediately write off the cost of investments rather than having to stagger them over a number of years. Having more stuff to deduct means smaller tax bills. If that’s the case, it could mean receipts will rebound in coming years because companies will not have those write-offs available to them in the future.

Another potential explanation: Trump’s tariffs, which could hurt corporate tax revenues in two ways. If a U.S. company that relies on components made in China suddenly sees the cost of those items increase, it will have more to deduct as business expenses. Alternatively, if a company is seeing fewer sales because it is passing along the cost of the tariffs to its customers, it will have fewer profits to tax.

A fourth possible factor: The law isn’t reducing profit shifting by multinational corporations as much as forecasters expected. By cutting the corporate rate, the Tax Cuts and Jobs Act was supposed to reduce the incentive for companies operating in multiple countries to stockpile profits abroad, out of the reach of the IRS.

Pomerleau concluded: “You either reduce business receipts or increase deductible costs, and either of those things reduce corporate taxable income. It may mean corporate tax liability is lower than we expected not because our projections of the TCJA were wrong, but maybe because we didn’t account for the fact that tariffs were going to lower corporate receipts.”