With 2017 quickly approaching, we have seen the market rally to new highs. The expectation of economic change has consumer confidence running high, and a decrease in the corporate tax rate seems to be the most probable change in the near future. But what would this cut in tax rates really mean for the US economy?
At 35%, the US has the highest corporate tax rate in the developed world. It is charged on profits earned abroad minus foreign tax paid when repatriated. This incentivizes companies to book their profit in low-tax countries (such as Ireland) and outsource jobs abroad so as to avoid US taxes and only incur the low taxes of the country they choose.
But aside from high tax rates, corporate investment in the US have been on the decline; consumption and saving patterns have weakened demand. And most corporations don’t pay 35% because of very aggressive tax efficiency strategies, allowing them to owe less. The tax code is riddled with loop holes that enable said strategies; the proposal for cutting corporate taxes also includes plans to simplify the tax code and cut regulation.
The idea is that if corporations can save on taxes, their earnings will grow. CNBC reported that for every one percentage point reduction in the tax rate, this could “hypothetically add $1.31 to 2017 earnings”. The current tax rate is at 35% with a goal of reducing it to 15%; if this 20% reduction takes place that could mean $26.20 added to earnings on average. Aside from these savings going to the bottom line, extra capital can be used for other purposes: investing in equipment, mergers and acquisitions, or stock buybacks.
An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.