Should We Tax Excess Corporate Profits?

Deficit spending by the government is merely the counterpart of private sector saving. What government deficit spending does is to permit the private sector to achieve its level of desired saving. When the latter changes, government spending ought to be adjusting in the opposite direction to offset it (unless the current account balance happens to do the job).

But consider the implications of what happens if one the economy’s three major sectors – in this case, the corporate sector – retains savings above and beyond that required to reinvest and establish growth in the productive economy.

If one examines recent cases in which the corporate sector remained a net saver, both the Japanese and Canadian experiences spring to mind. Even today, Japan’s corporate sector remains the largest repository of non-government savings, yet employment growth is virtually non-existent. Similarly, during the 1990s, the Canadian household sector was a net lender in the 1980s and 1990s and the corporate sector was a net borrower. So the biggest adjustment that came via Canada’s export boom was a huge increase in corporate savings during the years of Paul Martin’s fiscal austerity drive. But these savings were not really deployed aggressively for reinvestment in the productive economy and, hence, job creation.

As Professor Mario Seccareccia of the University of Ottawa has noted in a recent paper, in Canada during the latter half of the 1990s and during the subsequent decade, the corporate sector began to act like Keynes’s economic rentiers (“The Role of Public Investment in a Coordinated “Exit Strategy” to Promote Long-Term Growth: The Keynes Legacy“). An implication to be drawn from this analysis is that even when corporations build up massive savings, as they are now doing in Japan (and as they did in Canada in the mid-1990s), one ought to pose the question: if those profits are not being reinvested to create further job growth, shouldn’t the government tax them, so that it can use the fiscal resources itself to move policy in that direction?

As Seccareccia notes in the Canadian context, massive build ups of cash flow can and did facilitate all sorts of mischief – zaitech (i.e. financial engineering), accounting frauds, control fraud:

“[T]his reversal of the net lending/borrowing position of the business and household sectors is of critical importance in understanding the evolution of financial capitalism over the last decade, with much of the speculative drive having been fueled by the growing savings of the corporate sector. It was the rentier behaviour of the corporate sector, with the latter finding it ever more lucrative to engage in financial acquisitions, which largely led to an abandoning of productive investment since the 1990s.”

In this context, the entire economy becomes financialised and therefore far less productive and more prone to fraud and higher rates of unemployment. But it serves the interests of the economic rentiers. This is exactly what happened in Canada and has happened all over the world in the past decade.

It is true that taxing the savings of the corporate rentiers in itself will not necessarily lead to more spending in the economy. And from a Modern Monetary Theory (MMT) perspective, it is also the case that the government does not “need” the so-called fiscal resources to spend. The government is never revenue constrained per se and could easily do more regardless of its take on corporate tax receipts.

In making this concession, my point was not that corporate tax receipts are required for the government to spend, but more that the threat of taxation might induce the corporate sector to do some of the government’s “heavy lifting” on the job creation front. There’s some political advantage here because, as we are witnessing today, there are profoundly strong forces currently mobilizing against government spending on the spurious grounds of “fiscal sustainability.”

So let’s call their bluff.

There are additional social benefits to be derived from this proposal. If the government taxes excess corporate savings, it means there are fewer corresponding opportunities for corporate financial engineering, control frauds, etc., and therefore greater financial stability as you have an economy less prone to financialisation. That’s an unalloyed social good.

In effect, this becomes a tax aimed explicitly at the corporate rentiers who are not reinvesting their super profits in tangible capital equipment, except in tech/telecom bubbles, or in Chinese malinvestment schemes, etc. And it serves an ideological purpose of a) forcing nonfinancial capitalists to, well, be capitalists, not speculators, and b) ties the deficit reduction initiatives, which, as we have argued many times in the past, are insane and suicidal, but are nonetheless being carried out, to making the rentiers pay their “fair share.”

The deficit hawks have gained significant policy traction, but we need to perform whatever jiu jitsu we can to point the finger at the real source of the so called “savings glut”, which is lack of corporate reinvestment in anything but zaitech, payouts, financial engineering, and other delights of casino capitalism. We have to demystify what it means to have the whole system geared to serve “shareholder value,” and we have to demonstrate that capitalists are failing to serve their role before a large consensus behind public and public/private investment initiatives can be rebuilt from the ashes of Austeria.

It appears that massive build ups of cash flow facilitate all sorts of mischief – zaitech (i.e. financial engineering), accounting frauds, control fraud, etc. And this would be about the time modern compensation systems began to change, tying, more and more, management bonuses to share price. So you see firms “investing” their earnings in massive buybacks of their own stocks.

In Canada, the reversal of the net lending/borrowing position of the business and household sectors is of critical importance in understanding the evolution of financial capitalism over the last decade, with much of the speculative drive having been fueled by the growing savings of the corporate sector. It was the rentier behaviour of the corporate sector, with the latter finding it ever more lucrative to engage in financial acquisitions, which largely led to an abandoning of productive investment since the 1990s.

When an economy becomes financialised and therefore far less productive, it becomes more prone to fraud, greater financial instability, and higher rates of unemployment. But it serves the interests of the economic rentiers. Minsky was right: you need a “big government” to act as a stabilising bulwark against the financialisation of the economy. Taxing retained corporate earnings is clearly another aspect of dealing with the ravages of money market capitalism.

About Marshall Auerback 37 Articles

Marshall Auerback has 28 years of experience in the investment management business, serving as a global portfolio strategist for RAB Capital Plc, a UK-based fund management group with $2 billion under management, since 2003. He is also co-manager of the RAB Gold Fund. He serves as an economic consultant to PIMCO, the world’s largest bond fund management group, and as a fellow of the Economists for Peace and Security.

From 1983-1987, he was an investment manager at GT Management (Asia) Limited in Hong Kong, where he focused on the markets of Hong Kong, the ASEAN countries (Singapore, Malaysia, the Philippines, Indonesia, and Thailand), New Zealand and Australia. From 1988-91, Mr. Auerback was based in Tokyo, where his Pacific Rim expertise was broadened to include the Japanese stock market. From 1992-95, Mr. Auerback worked in New York for the Tiedemann Investment Group, where he ran an emerging markets hedge fund. From 1996-99, he worked as an international economics strategist for Veneroso Associates, which provided macroeconomic strategy to a number of leading institutional investors. From 1999-2002, he managed the Prudent Global Fixed Income Fund for David W. Tice & Associates, an investment management firm, and assisted with the management of the Prudent Bear Fund.

Mr. Auerback graduated magna cum laude in English and philosophy from Queen’s University in 1981 and received a law degree from Corpus Christi College, Oxford University, in 1983.

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1 Comment on Should We Tax Excess Corporate Profits?

  1. Hi

    That was tried already… and it was called the excess profits tax. It didn't work. There's no such thing as excess profits. Whatever the market will bear, and don't take it personal… its just business. (yikes) You also have a problem with government OF THE PEOPLE, and you think… like SO MANY… that its a game of opposites… free marketeers vs gov. Just remember that it is the gov who ALLOWS (and forces) the use of currencies, ownership, and allows little pyramid schemes of inequality'n'servitude called busyness.

    You DO see the pyramid scheme symbol on the back of the USA one dollar bill, right? You DO see the servitude infestation in capitalism, right? And do you see the "pay up or lose your wellbeing" Chicago mob-like felony extortion widespread within capitalism? Do you see the "join or starve" felony extortion done to the 18 year olds… by this ugly competer's church called capitalism? See how forcing competer's religions onto 18 year olds… kills membership in the cooperator's church (Christianity/socialism)?? Do you understand that AmWay (American Way) (New World Order) got "the exclusive" (legal tender) on the TYPE of survival coupons (money) accepted in supply depots (stores) and leverages 18 year olds into the organization via that felony activity as well? (It puts AmWay-coupon slaving requirements called price tags… on all the survival goods). Do you understand how farmyard pyramids work… from your childhood?? Remember?? Upper 1/3 are "heads in the clouds" while the kids on the bottom ALWAYS GET HURT from the weight of the world's knees in their backs? Still with me? Do you see anything illegal, immoral, or just plain sick… in any of this pyramid scheme's activities?

    Us American Christian socialists are still patiently awaiting the natural fall of the pyramid-o-servitude, or the busting of the free marketeers felony… by the USA Dept of Justice. Us Christians are VERY CLOSE to issuing a cease and desist order until the servitude and inequality goes away… which means it turns into a commune. Commune is a word we LOVE when used in the word "community"… but its one the caps HATE when used in the term "commune-ism". Go fig. PROGRAMMED!!

    Do a Google IMAGE SEARCH for 'pyramid of capitalist' to see a full color picture made way back in 1911, when capitalism was first discovered to be a con/sham instigated by the Free Masons/Illuminati. Folks sure bought into the thing… hook, line, and sinker just the same. The caps didn't even check if a string was attached! Now THAT'S easy fishing, eh?

    Time to level the felony pyramid scheme called capitalism. Abolish economies and ownershipism worldwide, and hurry. Economies just cause rat-racing, and rat-racing causes felony pyramiding. BUST IT, America! Look to the USA military supply/survival system… (and the USA public library system) for socialism and morals done right. Equal, owner-less, money-less, bill-less, timecard-less, and concerned with growth of value-criteria OTHER THAN money-value. Quit doing monetary discrimination immediately, and make it illegal. There are MANY measurement criteria of "value"… not just dollars. Try morals, efficiency, discrimination-levels, repairability, etc etc. Economies are cancerous tumors, and to cheer for their growth… is just insane. Profiting causes inflation, so if caps LIKE inflation, and if they LIKE a terrible time in afterlife when they meet the planet's ORIGINAL OWNER before caps tried to squat it all with ownershipism, then keep it up with the felony pyramiding. I dare you. While us Christians are finally bulldozing that pyramid scheme back to level, lets make servitude and "join or starve" (get a job or die) illegal in the USA, and lets level the architecture seen in USA courtrooms, too. Right now, USA courtrooms are church simulators or "fear chambers", by special design. Sick.

    Isn't that back-of-the-dollar pyramid… a Columbian freemason symbol? And WHERE is the USA gov located? District of Columbia? (Not even part of the USA!) How much more blatant can ya get? The "Fed" runs a pyramid scheme called the free marketeers. If you're using the "federal reserve note" certificates, or using no-other-living-thing-on-the-planet entitles of ownership, you're bought into a servitude/slavery con/sham… called capitalism. Pyramiding 101. Shake-off the tug-o-warring US vs THEM way of thinking if you please. Its all US.

    Larry "Wingnut" Wendlandt
    MaStars – Mothers Against Stuff That Ain't Right
    (anti-capitalism-ists)
    Bessemer MI USA

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