Engine of Inequality: Corporate Profits Enrich Shareholders At Expense of Public Needs

To build an economy that works for everyone and not just the fortunate few, we need to slow down the ‘engine of inequality’ through fairer taxes on corporations and the rich people who own them.

By William Rice

Big corporations owe a lot of their success to the social structures and services we all fund with our taxes: the highways, harbors, airports and internet they use to deliver their products; the public schools and colleges that train their workforce; the patent system and courts of law that uphold their commercial rights; public-safety agencies that guard their property against fire and theft; even the U.S. military that protects their foreign investments and personnel. 

You’d expect those firms to prioritize these common blessings of American society with adequate tax payments. But you’d be wrong, because corporations have a bigger priority: their wealthy shareholders.

According to a new report from Americans for Tax Fairness (ATF), during the first five years of the 2017 Trump-GOP tax law, 280 of the nation’s biggest companies spent seven times more on shareholder dividends and stock buybacks than they paid in federal income taxes. The lopsided score: $4.4 trillion in shareholder payouts to $608 billion in taxes. And those payouts went almost exclusively to the rich, who own almost the whole stock market and who in turn paid relatively little in taxes on that income themselves. 

These findings are particularly relevant as both political parties consider raising the corporate tax rate. It was slashed by two-fifths (from 35% to 21%) by the 2017 Republican law, many parts of which are due to expire at the end of next year. The corporate rate is not one of the expiring provisions, but interest is growing in restoring it to pay for extending provisions that benefit working families. President Biden also wants to raise taxes on rich stock investors. 

The report—titled “Engine of Inequality”—explains that shareholders can be rewarded in two ways for owning corporate stock: regular dividend payments; and capital gains (an increase in the value of the stock over its purchase price). The timing and amount of dividends are determined by the corporation. But the company can also help create capital gains by buying back their own stock and thus pushing up the value of shares remaining in investor hands. The companies in the study spent more on each kind of shareholder payout alone than they did on federal income taxes. 

That seven-to-one ratio of overall shareholder payouts to federal income taxes is the result of two simultaneous phenomena. One is that corporations have in recent decades started sending more and more of their profits to their stockholding owners, instead of investing in the business or raising worker pay. The other is that over that same period big firms have started paying relatively less in taxes. Corporate taxes have fallen as a share of total federal revenue and as a share of the economy. During the five years of the study, the firms in the report paid on average just 14%--that’s a lower tax rate than the average American family paid in 2021 (almost 15%). But of course, the two causes are related as well: when big companies pay less in taxes, they have more to spend on shareholders. 

The large-scale diversion of corporate profits into the bank accounts of wealthy shareholders and away from the public coffers that fund common needs would be less damaging if stock investors paid a fair share of those payments in taxes themselves. But they don’t. 

The report notes that the top tax rate on both qualified dividends and long-term capital gains is little more than half the top rate on work income: 20% vs. 37%. While capital gains have always been taxed at a discount, the similar privilege has only been accorded dividends for the past 20 years or so. The maddening result is that an emergency-room doctor saving lives all day can pay a significantly higher effective tax rate than a wealthy investor whose only job is to watch the dividends and capital gains pile up. 

Taxes are due on dividends for the year received, but taxes on capital gains can be delayed and finally escaped altogether by wealthy families. That’s because the tax is only due on a gain when the underlying investment is sold. But the super-rich with huge gains don’t need to sell to benefit: they can obtain low-cost loans secured against their swelling stock portfolio and wind up paying much less in interest than they would pay in taxes. 

Then, as an extra tax-break bonus, all those gains simply disappear for tax purposes once inherited by the next generation, courtesy of a loophole called “stepped-up basis.”

The report also notes that two-thirds of all publicly traded U.S. stock is held by foreign investors and tax-advantaged retirement accounts. Both types of share-owning temporarily or permanently avoid most taxes on capital gains and dividends. 

There’s no way of knowing how much in taxes was ultimately paid on those $4.4 trillion in shareholder payouts—but because of the tax-discounted and tax-free nature of so much stockholding, it probably was far less than most people would consider fair. The report suggests several useful public investments that could be funded if a quarter of those payments—or even just 10%—were collected in taxes. They include lowering childcare and education costs, establishing paid medical leave and giving parents more generous tax credits. 

If you’re looking for a central mechanism behind growing economic inequality, the nearly seamless translation of corporate profits into shareholder wealth is a good candidate. The report concludes: “To build an economy that works for everyone and not just the fortunate few, we need to slow down the ‘engine of inequality’ through fairer taxes on corporations and the rich people who own them.”