Politics & Policy

The Myth of Corporate Profits

© Dedmazay | Dreamstime.com – Rich Beetle Photo
Where is the evidence for the r > g crowd’s favorite talking point?

Have rising corporate profits come at the expense of the American worker? Venture capitalist and billionaire Nick Hanauer seems to think so. As he states, “corporate profits are at a 50-year high while unemployment is also at a 50-year high. If it was true that the rich were the job creators, we’d be drowning in jobs today.” Then comes another argument about how corporate profits have actually suppressed wages for the average worker. ThinkProgress headlines its piece, “Corporate Profits Hit Record High While Worker Wages Hit Record Low.”

First, let’s look at corporate profits and unemployment. It’s a bit of a strange argument, as it seems to imply that our recent economic crisis was a result of runaway corporate profits, not the bursting of the housing bubble. Regardless, Hanauer is probably blaming excess corporate profits for declines in aggregate demand, as he commonly makes the argument that the rich don’t spend enough of their income to keep the economy in equilibrium. Never mind that per-capita consumer spending has increased proportionately with the top 1 percent’s income share.

The above chart measures the unemployment rate against post-tax corporate profits before dividends are paid out as a percent of gross domestic income (which equals GDP, but is calculated differently). There doesn’t appear to be much of an inverse correlation between the two. In fact, during many periods there appear to be declines in corporate profits as unemployment rose.

There is also considerable evidence that corporate-tax cuts boost employment. Since the U.S. corporate-tax rate is higher than that of all other nations (and, yes, the effective rate is too), U.S. corporations have a strong incentive to do business overseas, and retain their profits there. Even if all U.S. corporations were forced to do business solely in the United States, the high corporate tax rate still dampens the amount of investment that would have otherwise taken place without the tax.

Corporate profits and unemployment don’t show much of a correlation, with the exception of recent years.

As for corporate profits and wages, the aforementioned ThinkProgress article uses this chart below to make its point. The red line measures corporate profits (no mention of whether they’re pre- or post-tax) and the blue line measures private-sector wages, both as a percentage of GDP.

Notice that what’s being compared is corporate profits to the wages of all workers, not corporate employees. Excess corporate profits would be at the expense of the employees of those corporations, not the entire labor force. Likewise, fringe benefits, which make up 19 percent of the average worker’s income, aren’t measured by this graph. Corporate profits and worker compensation should be measured as a percent of corporate income, not the economy as a whole.

Most important, the y-axes on the right and left sides of the chart aren’t held equal. They’ve been cleverly manipulated to get the result ThinkProgress wanted. When we measure corporate-employee compensation against pre-tax corporate profits and we don’t manipulate the y-axis, we get this result:

Historically, corporate profits have averaged 12 percent of corporate income, while employee compensation has averaged 63 percent. Of course, since these are pre-tax corporate profits, they’re actually somewhat smaller than they appear. Just as cutting corporate taxes leads to higher employment, a series of studies I catalogued in a recent column at Rare detail how workers’ wages would be higher if not for the corporate income tax, since corporations absorb part of the tax in the form of lower worker wages.

— Matt Palumbo is the author of The Conscience of a Young Conservative and In Defense of Classical Liberalism.

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