Free cash, corporate taxes, and the federal deficit

Over seventy years ago, Michal Kalecki noted that budget deficits would “permit profits to increase above the level determined by private investment and capitalists’ consumption.” Kalecki’s insight into the generation of “free cash” (cash in excess of new investment) was formulated at a time when consumer deficit spending and other private deficit spending was minuscule. But it can be shown that his insight can be extended not just to an expansion of public deficits but to private deficits as well. Over the past forty years, the rise of “free cash” and expanded deficits have allowed corporations to cut back on investment growth, funneling the excess cash into mergers, stock buybacks, and expanded dividends to the wealthy. In recent years, this outpouring of cash has accounted for well over fifty percent of corporate fixed investment. I run a simple “what if” exercise on U.S. corporate tax flows utilizing past U.S. tax rates to calculate the possible absorption of free cash and reduction of federal debt that would have been associated with such an exercise.