Recent data from the U.S. Bureau of Economic Analysis show that corporate profits account for a larger share of total gross domestic product (or national income) than at any time in decades. Meanwhile, wages and salaries make up the smallest share in half a century.
This is useful information, but don’t misinterpret it. How income is distributed among households is much more important than the split between wages, rents and profits. Fixating on corporate profits can lead to bad policy choices.
Corporate profits are misleading because corporations are not people. They don’t eat food, live in houses, go to movies or undergo chemotherapy. They don’t pass money down to children.
Rather, they are legal entities organized to carry out business. They buy productive resources that they make into goods and services. Any profits ultimately must pass to some household. This might occur directly as dividends or share price increases. It also might occur indirectly when pension plans or insurance companies get dividends and stock increases and use these to pay beneficiaries.
Many who hear “corporate profits” assume that they only go to a small group of wealthy plutocrats. This is partly true. The percentage of households that directly own shares of stock is small. Even among that minority, most dividend and stock appreciation income goes to the wealthiest 10 percent.
But other households benefit indirectly. Many own whole life insurance and participate in 401(k) or other retirement plans. Some own mutual funds.
Institutional investors include state retirement systems like CALPERS and MSRS, private retirement plans such as Teachers Insurance and Annuity Association (TIAA), investor-owned insurance companies like Travelers and Prudential and mutual ones like Thrivent. All depend on corporate profits to operate.
This does not mean that a historic low share for labor income and a historic high one for corporate profits are good news. We just have to go further to understand who ultimately gets what proportion of total national income.
The Census Bureau tabulates that with its Current Population Survey. Data for 2005 released last month showed a slight increase in inflation-adjusted median household income over 2004. However, most of the increase went to the highest-income households. For 80 percent of all households, real earnings remain below where they were in 2001.
This continues a 20-year-plus pattern in which most of the increase in real income has gone to the wealthiest households. Many low- and middle-income households have seen very little increase after inflation. Real wages are stagnant.
Certainly this is a legitimate policy issue and one of the most important of our time. Even so, resist knee-jerk calls for increased taxes on corporations. These don’t necessarily hit only rich people. Most corporate tax increases get passed along to consumers in the prices of products.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.