Economic Snapshot | Health

Profit rates remain at record high

A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for July 26, 2000

Profit rates remain at record high
While profit shares of national income for corporations have recently retreated from their highs of more than 21% in 1997, profit rates have begun to increase again. Profit rates are defined as the ratio of corporate profits (before and after taxes) relative to the capital stock of corporations. Thus, profit rates show a more accurate picture of the profitability of corporations than profit shares of national income.

Profit rates have continued to reach new heights. Before-tax profit rates amount to an average of 12.04% for the period from 1996 to 1999, which is only below the average before-tax profit rate for the 1960s. Further, after-tax profit rates have reached record levels during the latter part of the 1990s with an average of 8%.

A number of factors are obviously underlying this trend. First, corporations manage to generate high levels of profit. Second, corporate tax burdens have been declining. Finally, the capital stock of corporations has gradually been declining. Despite the fact that firms have continuously increased their investment outlays relative to gross domestic product, the capital stock of America’s corporations is relatively low. The main reason for this is that U.S. firms are investing heavily in information technology equipment that depreciates quickly. Consequently, high profits relative to a low base make for high profit rates.

Corporate sector profit rate

This week’s Snapshot by EPI economist Christian Weller.

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