The Marxist debate about the causes of the crisis of 2008-12 in the US and Europe continues to be sharply polarised. On the one hand, those who see it as basically caused by a fall in the rate of profit. On the other, those who think that it is, in a more complex way, a crisis of financialised capitalism.
Both sides agree, of course, that the financial sector – huge, greedy, and destabilising – was central in the immediate causation of the crisis. But a number of influential Marxists argue that the rapid growth of finance in the past two decades is itself a direct result of a fall in the rate of profit in the high-income economies. Because profits have been inadequate, the story goes, companies have preferred to use their spare capital to speculate on financial markets rather than to invest in the expansion of productive capacity. Low investment leads to low rates of growth in production, and high rates of unemployment. Economies become over-reliant on a rising volume of household and government debt to sustain demand. When levels of debt reach unsustainable levels, crisis is triggered.
The only book-length study of profit rates in the US is Andrew Kliman’s The Failure of Capitalist Production (2012). His conclusion is as follows:
A persistent fall in the rate of profit in the US was a key factor which set the stage for the Great Recession that started in 2008 and the malaise which continues after its official end. It led directly to a long-term decline in the rate of investment, and, indirectly, to a sluggish growth of output as well as rising debt burdens.
But a crucial step in this argument – namely that profit rates determine investment – has simply not been the case in the recent period. It is certainly true that business investment levels in the high-income economies have tended to lag since around 2000. But this is not because there has been a fall in profit rates – in fact, despite several brief downturns, they have been moderately, but persistently, on the rise ever since 1980. Other causes have been at work. For example there has been, since the early 1990s, a general fall in the prices of means of production in the world economy. This has reduced the amount of money capital which the average company has to advance to achieve a given level of investment in productive capacity.
Companies have used their spare capital to implement other strategies. They boost the price of their shares by making large payments to shareholders in the form of dividends and share buybacks. They build up large war-chests of reserve cash to increase their competitive capability via merger and acquisition operations. They evade taxation by stashing large amounts of their profits abroad. Their executives pay themselves exorbitant salaries.
Profit rates in the US
In the dispute between falling rate of profit defenders and their critics, the major battleground has been the United States economy, and its National Account statistics, so I’ll start there.
Here is my own presentation of the data on the US rate of domestic profit since 1947. The trend line is roughly similar to that found by most researchers – including leading defenders of the falling rate of profit thesis such as Michael Roberts, Guglielmo Carchedi and Alan Freeman. It is apparent that such data can be read either as supporting, or as refuting, the thesis of a decline in rates of profit. The declinists stress that the rate of profit was higher on average in the 1950s and 1960s than it has been over the past 30 years. Sceptics point out that, in the period since 1980, the trend in profit rates has been upward, though with a marked business cycle oscillation.
Corporate tax evasion
So far in these debates there has been surprisingly little discussion about whether the official profit figures we rely on will tend to underestimate profits because of the corporate tax evasion which has recently had so much attention in the media? Certainly the scale of such evasion is huge – through the use of such devices as transfer pricing, tax havens, and foreign subsidiaries. At 35 per cent the US has the highest rate of corporate profit taxation in the 34 countries which belong to the OECD. It is, however, 4th lowest in the rate of effective tax which corporations actually pay. In theory profits tax is supposed to be imposed on the foreign, as well as the domestic earnings, of US companies. But the system is riddled with loopholes.
A string of research reports has detailed the main devices used by US companies to evade taxation. One of the latest is Offshore Shell Games 2015, published by Citizens for Tax Justice. This deals with the use of offshore tax havens by Fortune 500 companies. The researchers were able to track down 7,622 tax haven subsidiaries operated by 358 companies out of the 500. They found that these companies were holding more than $2.1 trillion in accumulated profits offshore in order to evade US corporate taxation. This total had more than doubled in the six years since 2008.
The large US banks were prominent offenders. Most of the big non-financial multinationals were also found to be sheltering large accumulations of profits in tax havens. These included some exceptionally profitable companies such as Walmart, Pfizer, Nike, Pepsi, Microsoft and Google. The $2.1 trillion in company cash piles is, of course, not actually kept in places like the Cayman Islands or Bermuda. Creative accountancy is used to enable these reserves to be fed back into banks and money markets in Wall Street and other financial centres. .
Profitability is central in Marxist political economy and accurate empirical data is indispensable in our debates. Do the National Accounts profits data which we use take full account of tax evasion? I can find no direct discussion of this issue in the literature or on the internet. If any reader of this blog knows of relevant material, please let me know.
However, it is pretty certain that there are large underestimations of profits in the National Accounts. But there are many loopholes which allow US companies to declare profits – but in ways which legally exempt them from US taxes on corporate profitability. For example, if companies state that profits are ‘permanently reinvested’ abroad by their foreign subsidiaries, such profits can be declared to the tax authorities in the US [the IRS] and yet escape taxation. If reported to the IRS, profits will be included in the National Accounts. The use of tax havens does not necessarily mean that profits are concealed.
As the BEA Guide to National Accounts methodology explains, in arriving at their profits figures, the statisticians rely mainly on corporate tax returns, but they also cross-check these against company financial reports. There are good reasons why companies would not want too much to under-report their profits in their company accounts. Executive bonuses and stock options are closely linked to profit performance. Also the current valuation of a company’s shares in the stock exchange.
But the Tax Justice report I quoted earlier stresses that straight concealment and non-reporting of US profits in tax havens is on the increase. The widely discussed Panama Papers confirm the same trend in countries other than the US. In Marxist debate we should recognise that corporate tax evasion leads to an underestimation of profits in National Accounts.
Note, however, that, for the US, most Marxist researchers use data on profits made in the domestic economy, and which excludes the foreign earnings of US companies. I’ll discuss why -and whether it matters – in my next post.
Readings of Capital 