Long Run Net Effect of Lower US Corporate tax rates

[LongHaul]

Brainstorm on Long Run Net Effect of Lower Corporate Tax rates

 

This is a really complicated topic and I don't think anyone will always have all the answers so I thought we could put our brains together.

 

Key question:  How much will the bottom lines be effected by the lower corporate tax rates?

 

Here are my thoughts - for many commodity businesses almost all will be passed on to consumers - banking, insurance, oil and gas, etc.  This may take some time.  Shipping has very low tax rates but low ROE's also.

 

For higher quality businesses how much will they end up keeping.  That's a tough one.  I don't have a great answer. 

 

For businesses with a mix of intl and domestic - often much of the pretax earnings is already overseas but the US portion will still benefit.

 

I would be curious if anyone has any insights from low tax countries, history, etc.

 

 

[bookie71]

Here are rates for quite a few years.  what effect did they have on economy (about a year later)?

https://taxfoundation.org/federal-corporate-income-tax-rates-income-years-1909-2012/

[Cigarbutt]

Multi-variable questions with many perspectives.

 

Historically speaking, even if conceptually appealing, it is difficult to see some kind of correlation between corporate taxation and GDP growth, so other factors likely play a more important role.

 

When looking at trends for net profit margins in the last 20 to 30 years, it appears that gradually lower effective rates have played a contributory role and this may be projected forward?

A potential corollary is that firms, in general, have been able to "capture" the benefits of lower taxation. Of course, this can be good for the investor but a Laffer curve type of reasoning may apply because too much of a good thing is not a good thing.

 

What the company will do with increased net earnings is also important. In the last 10 to 20 years, not much has been invested in expansion capital expenditures. Under present circumstances, one would expect increased return to the shareholders through dividend and share repurchase. A similar pattern would be expected for repatriated funds.

 

Perhaps helpful to look at the average effective tax rate of the firm that you are looking at because the effect of enacted changes may be less than expected using statutory rates.

 

On a more mundane level, if history is any guide, even if less corporate taxation is "good", that means less government revenue which means lower expenditures (absolutely out of the question in political circles these days) or higher debt. So, there needs to be a cost/benefit analysis.

 

Here's a link which discusses some relevant points.

https://www.advisorperspectives.com/commentaries/2017/02/03/impact-of-lower-corporate-tax-rate

 

At this point, my take is that firms will benefit (to varying degrees) short term but I see a net negative long term.

 

[Cigarbutt]

The story on corporate taxes will be dynamic but will remain an important factor for the bottom line.

Link with potentially useful inputs for different industries:

http://budgetmodel.wharton.upenn.edu/issues/2017/12/15/effective-tax-rates-by-industry