White House officials, back in December, widely criticized the Joint Committee on Taxation's estimate of the cost of the soon-to-be passed tax cut. But if the first three months are any guide, the tax cut will end up being considerably more generous, not less, to corporate America than the committee and others forecast. How much? At least $300 billion, and likely a lot more, according to my calculations.
The evidence comes from first-quarter earnings reports — the first to put in real numbers how much corporate America is benefiting from the tax plan, which, starting this year, cut the U.S. corporate rate to a flat 21 percent from a previous marginal rate that topped out at 35 percent. Corporate profits in the first quarter rose 23.5 percent from a year ago, the biggest jump since late 2010. Some of that growth was due to the continued strength of the economy and perhaps the early stimulus provided by the tax cuts. But a good portion of the increase came from tax savings, which accounted for about 11 percent of overall profits but provided as much as 43 percent of the increase, according to my math. That was also more than previously expected. Analysts had thought the tax cut would lift profits by about a third.
Of course, companies were expected to receive the bulk of the tax savings. That's how the plan was designed. And the net income numbers say nothing about about capital expenditures and share buybacks, which are both up but accounted for differently from typical expenses on corporate income statements. The surge in profits, though, does show, once again, that at least for now companies are passing little of those tax savings along to employees or customers.
To determine how much the tax plan actually lowered corporate America's tax bill, and boosted profits, I looked at the corporate tax provision that companies in the S&P 500 reported for the first three months of the year. That's not actually how much they paid in taxes, which we will never know because companies don't have to make their tax returns public. Experts consider the accounting provision that companies take for tax payments to be a pretty good indication of whether taxes are going up or down. Those tax provisions also include state and foreign income taxes. But it's a pretty good bet that much of the drop comes from the newly enacted lower federal rate.
Using the tax provisions, I calculated the companies' tax rates in the most recent quarter and then compared them to the average of what those same companies paid in similar quarters for the past three years. I then applied the difference between this year's rate and what those companies had paid in the past to pretax profits to calculate the tax savings. I had to toss out any company that didn't have a pretax profit in the first quarter as well as companies that reported a tax benefit, rather than an expense, in the quarter. That included some pretty big companies, like Berkshire Hathaway Inc. and General Electric Co., which will certainly benefit handsomely from lower taxes in future quarters. I did include the relatively few companies that reported higher tax costs in the first quarter.
