Do Taxes and Interest Rates Discipline Corporate Profits? A Post-Keynesian Nonparametric Test

In the vast, humming machinery of the modern economy, a central question has long puzzled economists and policymakers alike: who really holds the reins on corporate profits? For decades, the standard view has been that governments and central banks act as the primary brakes and accelerators. The logic is straightforward: if a government raises taxes, companies keep less of their earnings, which should naturally lower their profits. If a central bank raises interest rates, borrowing becomes more expensive, and demand for goods often cools, which should also squeeze corporate earnings. In this traditional picture, policy is the master switch, and corporate wealth is the light that dims or brightens in response.

However, a different school of thought, known as Post-Keynesian economics, suggests the reality might be far more complex. This perspective argues that large corporations are not passive victims of policy but active players with significant power. They set their own prices, often adding a fixed margin on top of their costs, and they can sometimes pass higher taxes or borrowing costs directly onto consumers. If this is true, then the levers of government policy might not be as effective at controlling profits as we assume. The question becomes whether these policy tools actually discipline corporate behavior, or if companies have found ways to shield their earnings from them.

A recent study by Houssam Boughabi, a researcher at the Institut National de Statistique et d'Economie Appliquée in Rabat, Morocco, sets out to test this idea with a fresh approach. Instead of assuming a fixed relationship between policy and profits, the researcher asked a simpler, more direct question: once we account for the natural, market-driven way that profits tend to grow, do changes in taxes and interest rates still explain what happens to corporate earnings? To answer this, Boughabi examined quarterly data from the United States spanning from late 2016 through the end of 2025. This period covers nearly a decade of economic shifts, including the aftermath of the pandemic and various policy adjustments, providing a rich dataset to observe how profits behaved in the real world.

The researcher began by isolating the "laissez-faire" component of profit growth. This term refers to the natural tendency of profits to rise or fall based on market prices and demand, without any government interference. Using a statistical method that does not force the data into a pre-determined shape, the study first mapped out how corporate profits moved in response to changes in the S&P 500 stock index, which serves as a broad measure of market prices. This step was crucial; it allowed the researcher to calculate what profits should have been based purely on market dynamics. Once this baseline was established, the researcher looked at the difference between what actually happened and what the market dynamics predicted. This leftover gap, or "policy-profit gap," was then tested against changes in tax rates and interest rates to see if these policy tools could explain the difference.

The results of this analysis were striking in their simplicity. When the researcher tested whether changes in tax rates or interest rates could explain the gap between predicted and actual profits, the evidence did not support the idea that these policies were the driving force. The statistical tests showed that the influence of tax changes and interest rate changes was so small and uncertain that it could not be distinguished from random noise. In other words, once the natural movement of the market was accounted for, the specific policy actions taken by the government and the central bank did not appear to significantly discipline or control corporate profits during this period. The study found that the coefficient for tax changes was positive but statistically insignificant, and the coefficient for interest rate changes was negative but also statistically insignificant. This means that while the direction of the numbers matched some economic theories—taxes slightly tending to reduce profits and higher rates slightly tending to lower them—the effect was too weak to be considered a reliable rule.

To ensure these findings were not a fluke, the researcher subjected the data to several rigorous checks. The study compared different mathematical models to see if adding tax or interest rate variables actually improved the ability to predict profits. The results showed that the simplest model, which relied only on the constant baseline, was just as good as the complex models that included policy variables. Furthermore, the study tested whether the results changed if the data was viewed through different lenses, such as using logarithmic transformations to handle extreme values or splitting the timeline in half to see if the rules changed over time. In every case, the conclusion remained the same: there was no strong evidence that tax or interest rate changes were the primary drivers of the unexplained profit movements.

This does not mean that taxes and interest rates have no effect on the economy at all, nor does it prove that corporations are immune to policy. The study is careful to note that the data covers a specific, relatively short period and that the methods used have their own limitations. The researcher acknowledges that the sample size was small, containing only 38 quarterly observations, which makes it harder to detect subtle effects. Additionally, the study used broad national averages for taxes and interest rates, which might not capture the specific experiences of individual companies or different industries. However, within the scope of this specific analysis, the evidence points to a conclusion that challenges the conventional wisdom. It suggests that in the modern U.S. economy, corporate profits are largely governed by the internal dynamics of market prices and the power of firms to set their own margins, rather than by the external discipline of fiscal and monetary policy.

The implications of this finding are significant for how we understand the balance of power in the economy. If the traditional levers of government policy are not effectively disciplining corporate profits, it implies that the ability of large firms to maintain their earnings is more robust than previously thought. This aligns with the Post-Keynesian view that profits are not just a reward for efficiency or a result of competitive markets, but are deeply rooted in the institutional power of corporations to set prices and manage their financial structures. The study suggests that as long as companies can pass costs on to consumers or adjust their strategies to protect their margins, the standard tools of tax and interest rate adjustments may not be enough to significantly alter the trajectory of corporate wealth.

Ultimately, this research offers a quiet but powerful correction to a common assumption. It does not claim that policy is irrelevant, but rather that its power to control profits is much weaker than the standard economic models suggest, at least when the natural rhythm of the market is taken into account. The data tells a story where the market's own momentum is the dominant force, and the hand of policy, while present, is not the one steering the ship. For anyone interested in the future of economic policy, this suggests that if the goal is to influence corporate profits, simply adjusting tax rates or interest rates may not be the most effective strategy. Instead, understanding the deeper structural forces of market power and pricing behavior becomes essential. The study leaves us with a clearer, if more complex, picture of an economy where the rules of the game are set less by the government and more by the companies themselves.