Trends in Corporate Economic Profits and Tax Payments, 1998 to 2017
Over recent decades, corporate economic profits have grown faster than the amounts that corporations pay in federal taxes. CBO examined the factors that explain why corporate tax payments have not grown with corporate economic profits.
Over recent decades, the economic profits of corporations (that is, profits from current production) have grown in relation to the size of the economy, whereas the amounts that corporations pay in federal taxes have remained stable. That pattern, which cannot be explained by changes in federal statutory corporate tax rates, reflects a divergence between economic profits and the corporate tax base (income that is subject to the corporate tax). Because such differences affect how the Congressional Budget Office projects revenues from the corporate income tax, the agency has analyzed the relationship between the two measures. This report breaks down and explains that relationship.
Economic profits and the corporate tax base are two different concepts, and there are many reasons they might diverge. In the analysis underlying this report, CBO considered three factors that contribute to that divergence:
Conceptual differences between the measure of economic profits and the measure of tax profits (net income as defined under tax rules);
Differences in the types of businesses included in each measure of profits; and
The tax treatment of losses and special deductions.
Overall, CBO finds that conceptual differences, particularly differences in the treatment of foreign profits, account for much of the growth in the gap between economic profits and the corporate tax base. Differences in the types of businesses included in each measure also help explain why there is a gap, but the effect of those differences has been relatively stable in recent years. Finally, the tax treatment of losses helps explain variations in the gap over the business cycle.