The earnings boom isn’t just about lower taxes

In the first quarter of this year, after-tax US corporate profits as measured by the Bureau of Economic Analysis went up a lot (at an 8.2 percent annualised rate over the previous quarter), but pretax profits only went up a little (1.2 percent). That raised questions of whether all those great first-quarter earnings reports were mainly just the result of a one-time boost from the big corporate tax cut Congress passed in December. A lot of solid second-quarter earnings reports seemed to indicate that there was more to it than just tax cuts, and today we have the official if far from final answer from the BEA: Corporate profits are on a genuine roll.
The corporate tax bill even went up a bit in the second quarter, with pretax profits rising at a 3.3 percent annualised pace and after-tax profits at 2.4 percent. This is good news for the economic outlook — downturns and slowdowns are often preceded by dips in corporate profits — and also a sign that the corporate part of the Tax Cuts and Jobs Act may to at least a modest extent be delivering as advertised.
A lot has been written about the corporate tax cuts’ failure to boost wages, which is fair given that the White House Council of Economic Advisers did promise a $4,000-per-household pay hike, but a bit premature. The tax cuts do, however, already seem to be delivering or at least coinciding with an increase in corporate profits and investment. A longer-term view of corporate profits tells another interesting story:
As a share of national income — which, unlike gross domestic product, includes income from overseas just as the corporate profits data does — pretax corporate profits are high but not as high as they were at times in the 1950s and 1960s.
After-tax profits’ share of national income, meanwhile, is at a level never seen before 2010 (the BEA has annual data going back to 1929) and seemingly headed towards a new record. Leaving aside questions of who actually pays corporate taxes in the end, this shrinking of the corporate tax burden does seem at least superficially to have been a tremendous gift to shareholders over the past few decades. Wonder how long it can keep giving.

— Bloomberg