Power & Frerick (2016): Have Excess Returns to Corporations Been Increasing Over Time?

Summary

Power and Frerick, "Have Excess Returns to Corporations Been Increasing Over Time?" (National Tax Journal; also Treasury Office of Tax Analysis Working Paper 111, 2016), measure what share of the US corporate tax base represents the normal return to capital versus excess returns — returns above what a risk-free benchmark would generate, the tax-data operationalization of economic rent plus risk premia.[1]

Findings

Using C-corporation tax-return microdata for 1992–2013, the normal (risk-free-rate) return share of the corporate tax base averaged 40 percent in 1992–2002 and 25 percent in 2003–2013 — equivalently, excess returns rose from roughly 60% to roughly 75% of the base.[1] The paper's own abstract states the risk-free fraction "has gradually declined over time, averaging 40 percent from 1992–2002 and 25 percent from 2003–2013" (verified against OTA WP 111, this session). The decline is not an artifact of accelerated depreciation: computed on economic depreciation the risk-free fraction still averages "40 percent during the first half of the analysis and around 25 percent in the second half" (p. 8). Multinationals show a lower and more sharply declining fraction (~30%→15%); domestic corporations the highest (~55%→40%).

This is the actual source of the widely circulated claim that "60–75% of the US corporate tax base is excess returns." It sits in a family of Treasury-data work: Cronin, Lin, Power & Cooper (2013) had already attributed 63% of corporate taxable income to supernormal returns in Treasury's distributional methodology (assigning that share to shareholders), and Fox (2020) later showed that for 1995–2013 the actual corporate tax raised roughly what a pure cash-flow tax would have — implying the existing tax already falls predominantly on above-normal returns.[2]

Interpretation — and Its Limits

The finding cuts two ways, per the wiki's rent gradient:

• For the Geoist reading: a corporate tax base that is 60–75% excess returns means rent-targeting designs like the allowance for corporate equity or a cash-flow tax would exempt only a minority of the base — rate-for-rate, most corporate revenue survives the switch while the distortion falls on the exempted normal-return margin.
• The honest caveat: "excess over the risk-free rate" bundles pure rent with risk premia and quasi-rents on innovation — the benchmark choice drives the number (Reynolds & Neubig 2016), and the Schumpeterian objection turns on exactly that bundling.[3]

See Also

• Corporate profits increasingly reflect economic rents — the outcome this supports
• Allowance for Corporate Equity · Cash-Flow Tax
• Objection: Taxing quasi-rents kills innovation — why "excess" ≠ "rent"

Sources

1. Laura Power & Austin Frerick (2016), "Have Excess Returns to Corporations Been Increasing Over Time?", Treasury Office of Tax Analysis Working Paper 111 — used for the 40%→25% normal-return share finding (abstract and pp. 7–8, verified against the Treasury PDF this session; robust under economic depreciation). Treasury PDF · SSRN
2. Julie-Anne Cronin, Emily Lin, Laura Power & Michael Cooper (2013), "Distributing the Corporate Income Tax," National Tax Journal 66(1); Edward Fox (2020), Journal of Empirical Legal Studies 17(1) — used for the companion Treasury-data findings (63% supernormal; CIT ≈ cash-flow tax 1995–2013). OTA TP-5 · Michigan Law
3. Hayley Reynolds & Thomas Neubig (2016), OECD Taxation WP 28 — used for the benchmark-dependence caveat. OECD