Published On: Tue, Dec 26th, 2017

Will Tax Breaks Really Help to Bring Business Back to the US?

The biggest question on everybody’s mind is how an overhaul of the corporate tax structure could positively impact the US economy. The National Economic Council is one of the most important bodies used for reviewing economic policy in the US. The director of the NEC, Gary Cohn is also one of the leading Republicans spearheading the current tax overhaul. In November, he attended the Wall Street Journal’s gathering of top-tier executives. These folks were interested to learn more about how current tax proposals could benefit the corporations.

Based on the responses from delegates, only a handful of companies indicated their willingness to invest in growth initiatives in the US economy. The GOP remains convinced that this tax plan will stimulate US economic growth. The theory is sound: less tax means more money available for jobs growth and reinvestment. However, there is nothing to suggest that US companies won’t be repaying their investors through dividends and share buybacks.

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The US Simply has to be More Competitive

If the US economy can compete with the rest of the world in terms of corporate tax rates, there’s nothing to suggest that the tax overhaul by the House and Senate will not work. Currently, the statutory corporate tax rate in the US (federal + subnational tax rates) is above 35% – significantly higher than OECD countries which have dropped to around 25% or less. On paper, the tax rate will be cut sharply from 35% to just 21%. This is the highest corporate tax rate in the G-20.

Like it or loathe it, there is a solid case to be made for the non-competitiveness of the US economy when such high tax rates are levied at corporate level. Once you get to the nitty-gritty of paying taxes in the US, few companies pay 39% or even 35%. Currently, US corporations pay on average 22%, and this is precisely why there may have been such a lack of excitement when the director of the NEC, Gary Cohn asked business delegates and leaders if they would be willing to invest more in the US economy.

What Is the Average Tax Rate Paid by Industry?

Aswath Damodaran of New York University compiled a graphic of official tax rates including state taxes and the actual taxes paid (on average) by some 95 industries. Here are approximate effective tax rates of firms in the industry:

  • The Coal industry pays the lowest effective tax rate at just over 0%
  • Real Estate Investment comprises just over 200 firms in the industry and pays under 5%
  • Oil/Gas Production comprises 300+ firms in the industry and pays just under 10% in effective tax
  • Biotechnology comprises 400+ firms in the industry and pays approximately 20% effective tax rate
  • Regional banks comprise over 600 firms in the industry, and they pay an effective tax rate of around 30%.

Therefore, it is safe to say that the biggest benefactors of impending tax legislation will be the banks and financial institutions. Once again, Wall Street heavyweights benefits from friendly legislation designed to put more money back into the financial system. Wilkins Finance expert, John Cornish believes that we will see a run on bank stocks in 2018:

Trading activity has been exceedingly bullish in recent months, and we attribute this to the Trump administration’s multi-pronged approach to stimulating economic activity in the US economy. Everywhere you look, there is evidence that bank stocks are going to rise. For example, the Dodd Frank regulations are being shredded to allow banks to operate with less of a capital cushion and less stringent regulations. This will free them up to lend more money to investors, borrowers and businesses. Additionally, we’ve got the Fed operating independently and raising interest rates (the last one was in December 2017 for a 25-based point hike) in the region of 1.25% – 1.50%. As if that’s not enough, we’ve got additional stimulus coming in the form of corporate tax cuts from 35% down to 21%. All in all, one would have to be foolhardy not to see the upside for banking and financial stocks in 2018’

Author: Jeff Broth

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