On the Disparity between Corporate Profits and Economic Growth

• In Event: Accounting information and Economic Forecasting

Abstract

We investigate the relation between the growth in corporate profits and economic growth in the United States. We find that when the U.S. corporate tax rate is comparable to the tax rates of OECD countries, growth in corporate profits is almost identical to growth in the economy. When U.S. tax rate is higher than the OECD average, which has been the case for more than two decades, corporate profits grow at almost twice the rate of the overall economy. This disparity is unsustainable in the long run. Social, political, and economic pressures should eventually cause the growth rates in corporate profits and the broader economy to realign. Using an exogenous shock, and cross-country and cross-sectional analyses, we identify the relatively higher corporate income tax rate and the U.S. accounting treatment of foreign earnings as underlying mechanisms contributing to this disparity. These factors result in fewer corporate profits being channeled to subsequent domestic investments, leading to lower economic growth.

Authors

• Ethan Rouen, Columbia University Business School

• Suresh Nallareddy, Columbia University Business School

• Urooj Khan, Columbia University Business School