The Two-Tiered Economy

Since the arrival of the POR (Pelosi-Obama-Reid) economy just over two years ago, there has been a profound shift in the economy. Many big businesses are holding their own, while all too many small businesses are getting hammered.

Some of the best evidence supporting this observation can be found in the Treasury Department's Daily and Monthly Treasury Statements. The June Monthly Statement, covering the first nine months of the current fiscal year, tells us that receipts from corporate income taxes were $133 billion. This is what "C corporations" have directly paid to Uncle Sam. Though this amount is down by 44% compared to the first nine months of 2008 (more on that in a bit), it's an increase of almost 31% over the $102 billion received through the same time last year.

Meanwhile, in the last Daily Treasury Statement for July, the "Individual Income and Employment Taxes Not Withheld" line item, plus a smaller one called "Individual Income Taxes," have totaled $276 billion through the first ten months of fiscal 2010. These two lines represent gross amounts paid directly by individual income tax filers (excluding refunds), and primarily arrive as quarterly estimated tax payments from the self-employed and those who own Subchapter S and limited liability corporations. These collections through July are down almost 9% from the $313 billion seen during the same period in 2009, and a whopping 28% from the $437 billion collected in the first ten months of fiscal 2008.

The increase in corporate income tax receipts indicates that after a year of recession accompanied by a painful adjustment to the new statist reality (which explains the steep drop in receipts from fiscal 2008 to 2009), large firms have figured out how to survive in this "It's the Uncertainty, Stupid" economic environment by grabbing market share from less solid and often smaller competitors, aggressive price-cutting, slashing costs, and, after a year of so of having to let employees go to maintain decent returns for shareholders (and in some cases, just to stay in business), generally not hiring people back.

Large firms' lobbyists and lawyers have enabled them to better navigate the morass of government rules and regulations without getting tripped up. Because of their access and political contributions, they have also likely been more successful at getting a disproportionate share of the federal government's purchases, one of the few areas of the economy that is growing. As seen here, in the past eight reported quarters, the federal government's consumption and "investment" that is considered part of the economy's gross domestic product (GDP) grew by over 12% in real terms. The rest of the economy, despite four quarters of "recovery," is still over 2% smaller than it was two years ago.

The proof is in the cash flow, both to the government, as noted above, and into corporate coffers. As of the end of this year's first calendar quarter, the 500 largest non-financial corporations had total cash balances of $1.8 trillion, up by hundreds of billions in just twelve months. Yet they're not investing -- nor should they, as long as uncertainty and weak demand remain. But they'd better be wary of sitting on their cash hoard for too long before distributing some of it to shareholders. The IRS might dust off the accumulated earnings tax, an arcane, little-known, and seldom-used punitive weapon it has in the past aimed at companies that build up cash reserves beyond what is needed to finance operations and expansion. Big business had also better watch out for a building backlash from ignorant but potent demagogues in the government and the press.