Taxing Businesses: Domestic Investment

Part 8 of a series about Taxing Businesses

After the 1980s tax reform the decline in savings and the increase in consumption caused domestic investment to fall, swamping any increase due to incentives from lower taxes on high incomes.

Data source: Federal Reserve Economic Data

The codes used to download data: 

  • W171RC1Q027SBEA .   Net domestic investment, Billions of Dollars, Quarterly, Seasonally Adjusted Annual Rate
  • W170RC1Q027SBEA    Gross domestic investment, Billions of Dollars, Quarterly, Seasonally Adjusted Annual Rate
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Taxing Businesses: Personal Consumption

Part 7 of a series about Taxing Businesses

 

As corporate savings decreased (as a consequence of increasing the number of pass-through businesses), it was not replaced by personal savings but by personal consumption. Since the 1980s, consumption as a percent of GDP, went from around 60% to 68% mostly due to more money spent on services.

Data source: Federal Reserve Economic Data

The codes used to download data: 

  • DDURRE1A156NBEA   Durable goods
  • DSERRE1A156NBEA    Services
  • DNDGRE1A156NBEA   Nondurable goods,

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Taxing Businesses: Net Savings

Part 6 of a series about Taxing Businesses

In the 1980s the effective top rate on pass-throughs (unearned) was dropped to match the corporate rate on profits, making pass-through businesses more desirable than in the past since with pass-throughs owners were not double taxed. As a consequence, these tax changes created an incentive to change the business structure from C corporation to pass-throughs. The double taxation of corporate profits had provided an incentive for corporations to retain earrings (to save) but a pass-through's profit is tax indifferent between saving and consumption (there is no incentive to either save it or spend it).

C corporation's share of net business income dropped from 1980 to 2012, 68% to 37%. The effect of fewer C corporations and more pass-through businesses was less savings since retained earnings by corporations was half of private savings (pdf). So, tax-induced decrease in number of corporations had a substantial effect on the level of private savings in the US.

Data Notes: Tax rates are from Internal Revenue Service; Tax Policy Center; Center for Tax Justice; Tax Foundation and  more details on the tax rates available in Part 1 and Part 2 in the series.

Federal Reserve Economic Data is the source for net savings.


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Taxing Businesses: Tax Receipts

Part 5 of a series about Taxing Businesses

Although profits and therefore corporate tax receipts varied with the business cycle, the corporate tax receipts generally declined from the 1950s to late 1970s, falling to less than 3% of GDP in the bad economy due to inflation and oil shocks.  However Federal tax receipts collected from corporate tax code never returned to previous values when the economy recovered because the number of c corporations declined and the number of pass-throughs increased. With the increase in pass-throughs one would expect the receipts from individual income tax returns to increase but they didn't.


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Taxing Businesses: Decline of Listed Companies on Stock Exchange

Part 4 of a series about Taxing Businesses

This is an intriguing graph showing the decline of companies listed in the United States on the stock exchange. (These companies would be corporations whose's stocks are freely traded on a stock exchange, not pass-throughs).

The tax changes in the 80s provided a tax incentive to change the business structure from C corporation to pass-throughs like LLCs. Originally, the IRS was very strict as to when a business could be treated a pass-through entity, however, that changed on January 1, 1997. That is when you see the ratio of listed companies the stock exchange drop dramatically.

Data Notes: Federal Reserve Economic Data (FRED); Historical Data for listed companies The U.S. listing gap Craig Doidge, G. Andrew Karolyi, and René M. Stulz 

  • FRED code for Number of Listed Companies for the United States (DDOM01USA644NWDB)
  • FRED code for Civilian Noninstitutional Population (CNP16OV

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