Corporate profit bonanza

In the last three months of 2023, after-tax corporate profits reached an all-time high of $2.8 trillion. This is part of a long-term growth in corporate profits that began in the 1980s, picked up steam at the turn of the millennium, and exploded since 2020. 

Notably, the surge in corporate profits since 2020 has been fueled, in part, by expanding corporate profit margins. Last year, corporate profit margins (excluding the financial sector) were over 15%, a level not seen since the 1950s. This is because the increases in prices for goods and services have outpaced the increase in costs — both labor and non-labor — for corporations. 

According to an analysis from the Groundwork Collaborative, "corporate profits drove 53 percent of inflation during the second and third quarters of 2023 and more than one-third since the start of the pandemic." In the four decades prior to the pandemic, corporate profits contributed to just 11% of price increases. 

Theoretically, this should not happen. Corporations should not be able to dramatically increase their profit margins by increasing prices because competitors should step in with lower prices and steal market share. So what's going on?

Greg Ip, who writes about economics for the Wall Street Journal, suggests that corporations are collectively taking advantage of consumer psychology. Supply shocks related to the pandemic created widespread cost increases that consumers accepted. Although those supply shocks have dissipated, many businesses have maintained higher prices anyway. "If people are paying $3 for a dozen eggs last week, they’ll pay $3 this week. And firms take advantage of that," Yale University economist Mike Sinkinson explained. 

This kind of informal collusion works best in concentrated industries. The Groundwork Collective highlights the diaper industry, where "Procter & Gamble Co. (P&G) and Kimberly-Clark Corp. control 70 percent of the domestic market." Since the onset of the pandemic, "[d]iaper prices have increased by more than 30 percent" — from $16.50 per package to nearly $21. This was initially driven by an increase in the price of wood pulp, a key input for diapers but also paper towels and toilet paper. But since January 2023, prices for wood pulp have declined by 25%. 

But P&G and Kimberly-Clark are not reducing diaper prices. Instead, they are bragging to investors about their massive profits. In July 2023, P&G "predicted $800 million in windfall profits because of declining input costs." In October 2023, Kimberly-Clark acknowledged that its input costs were coming down, but said that its products were still "priced appropriately." 

Similar dynamics are playing out in many other industries, including "new and used cars, groceries, and housing." 

How corporations are using their windfall

It's possible for corporate profits to be used productively to fuel innovation and growth. But that doesn't appear to be happening. Economist Christian Weller notes that corporations are using their record profits "mainly to pay dividends to their shareholders and building up their stockpiles of cash."

Between December 2019 and December 2023, non-financial corporations used almost half of their pre-tax profits (48.9%) to pay dividends to investors. That is the highest share of corporate profits devoted to dividends since the 1950s. The same group of corporations now has $7.2 trillion in cash, up from $6.1 trillion in 2019, adjusted for inflation. Meanwhile, capital expenditures — which is a key way corporations invest in the future — are at historic lows relative to profits. 

The path forward

In light of these record corporate profits, the government has a few choices. It could choose to raise corporate tax rates and use the funds to help people in need, such as children in poverty. In March, President Biden released a proposal that would raise the corporate tax rate from 21% to 28%. Biden’s proposal also includes raising the minimum tax for corporations with $1 billion in profits or more from 15% to 21%. 

The government could also choose to maintain the current corporate tax rate of 21 percent, which was established by the Trump Administration in 2017 in the Tax Cuts and Jobs Act. Trump wants voters to believe that if he is reelected, he will not prioritize corporate tax cuts. In January, Bloomberg reported that Trump plans to “keep[] corporate tax levels unchanged in an appeal to working and middle[-]class voters.” Stephen Moore, an economic advisor to Trump, told the Washington Post that Trump “said that he really wants to focus more on small businesses than corporations” and that “he’s fine with the corporate rate where it is.” 

The government could also choose to cut the corporate tax rate even further and facilitate even larger corporate profits. Trump has expressed interest in lower corporate tax rates, perhaps as low as 15%. Project 2025, a blueprint for Trump created by the Heritage Foundation and a large coalition of conservative groups, suggests cutting the corporate income tax rate to 18%.