Corporate tax cut in the US

[dyow]

I was reading the tax reform proposal by republicans under "a better way".

 

They want to reduce big corporation tax rates from 35% to 20%.  Obviously this would impact everyone on the board that owns US corp stocks.

 

This question is for any of you familiar with US tax law or how laws are passed in the US. 

 

- Is this tax cut pretty much a done deal with Trump in office and republicans in control?

 

- If so, how long would this take to come into law?  I know in Canada something like this can be implemented pretty quickly (IIRC in Canada it doesn't have to go into the the actual wording of the tax code, it can be passed more informally through regulations, and it becomes effective once it goes through a couple readings in the house of commons, or something like that), but not sure how it works south of the border.

 

Thanks. 

 

 

 

Make COBF great again

[Tim Eriksen]

Trump wants 15% and the House Republicans 20%.  Yes I think it is a done deal and will passed fairly quickly and be retroactive to the beginning of 2017.  There are some issues that have to be ironed out, for example immediate expensing of capital equipment.  Last I heard if a company chose that option it could not deduct interest expense.  What they need to clean up is the whole subisidiary in Ireland that owns the IP and makes most of the profits avoiding US taxation.  Maybe the lower rate will capture that on its own, but they need to ban it.  If some of that "lost revenue" comes back to US taxes the overall cost of the tax cut would be smaller.  Right now corporate tax revenues are about 300 billion annually, so a tax cut would likely reduce that by 100 billion.  But it should lead to greater investment, a wealth effect, improved pension plan funding, higher employment, etc.   

[dyow]

OK thanks for the reply Tim.

 

If this is a done deal, this is a YUGE tax cut - the immediate tax write off of capital is also huge.

 

I am trying to wrap my head around this.  I am kind of writing as I am thinking here. 

 

From just looking at the tax cut, this is an immediate boost to net income of about 23% for all profitable US based corps (on $100 pre tax net income with the tax cut would be $80 instead of $65).

 

But it is not so straight forward because:

 

- Every company has different tax circumstances (if you have a lot of future tax assets the tax cut is not as beneficial, and if you have timing differences your cash taxes might be lower than 35% to start).

- The laws could be reversed in the future.

- What discount rate would you use, on that additional income? if tax cuts cause growth/inflation the discount rate on those future cash flows should change because interest rates will change.

 

But if you are a company paying 35% in cash taxes at present this should be a huge boost.  Off the top of my head i am thinking of wells fargo as an example, i have to double check but i am pretty sure they consistently pay around 35% in cash taxes.  and even with the recent run up I don't think a tax cut has been priced in.  But i need to look at this more and idk what the final rules will look like, and if the 20% (or 15%) will be applied to every industry.

 

I assume other members on the forum would have similar issues trying to analyze this. 

 

Anyways, it is late, time to go to bed and dream about tax cuts....hmmm tax cuts. 

 

[DooDiligence]

Right now corporate tax revenues are about 300 billion annually, so a tax cut would likely reduce that by 100 billion.  But it should lead to greater investment, a wealth effect, improved pension plan funding, higher employment, etc. 

 

Who knows; maybe trickle down will work this time...

[Guest Schwab711]

What they need to clean up is the whole subisidiary in Ireland that owns the IP and makes most of the profits avoiding US taxation.   

 

I think you are right about interest deduction. I wonder how that effects heavily indebted companies going forward.

 

I'm pretty sure the most recent updates on the Republican plan included a shift to a territorial system, which would address the incentives of setting up Irish subsidiaries. Either way, as others have mentioned in similar threads, if we make any large changes the global tax system really has to go. Dems just released a similar plan not 3 years ago that was essentially identical. There's no excuse for the overhaul to not be completed in the first few months. Based on past proposals, this tax plan really should have full bi-partisan support (it won't, but it should).

 

I wonder if there will be some sort of penalty on foreign IP at some point. A lot of officials have egg on their faces from these Irish subs deteriorating the tax base (and leaving generally rural America). There's no benefit in the future, but also no means to bring that IP back. With Europe facing such uncertainty, it's probably not smart to legally domicile all that IP overseas without a benefit.

 

If the 2004 repatriation holiday is any gauge, we are probably in for some major buybacks/special dividends if this becomes law.

[Pelagic]

In the same vein as tax cuts I think there's going to be a push for a repatriation of funds held overseas either allowing US firms a tax holiday to bring them back home at a lower rate or setting a lower rate permanently. This will likely be even easier to pass through congress than corporate tax cuts.

 

Trump's plan for repatriation

 

It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent.

 

The real question for investors though in both cases, repatriation and tax cuts, is what will companies do with the excess cash? It's hard to imagine an easier way to achieve a 23% boost to net income than waking up one morning and finding Republicans passed a bill lowering corporate tax rates. Will this lead to more investment in US companies from foreign investors since US firms are now capable of returning a larger portion of earnings to shareholders? A capital flow out of more taxed companies abroad into less taxed US companies - it's interesting to think about.

[John Hjorth]

From an accounting and reporting perspective, provisions for taxes already deferred in the US will be adjusted downwards, the adjustments eventually ending up in book equity.

 

Edit: Added the word "already".

[scorpioncapital]

from what I've seen companies like royalty franchises or service income, as well as domestic investment bank profits pay very high taxes, sometimes like 40%+, so that will benefit. Other multinationals or industrials already seem to pay in the 20 to 30% range and so not so much.

[John Hjorth]

An article about the effect on the BRK financials of the expected US tax cut:

 

Berkshire Boost From Trump Tax Plan Seen as High as 29 Billion.

[ScottHall]

An article about the effect on the BRK financials of the expected US tax cut:

 

Berkshire Boost From Trump Tax Plan Seen as High as 29 Billion.

 

I don't really think this matters. If accelerated depreciation is axed and/or interest expense is no longer deductible if you elect that, it will harm Berkshire's utility operations which pay no net cash taxes in aggregate and in fact MidAmerican has substantial tax receivables on its books because of the "losses" it shows under current tax law. It's not quite as simple as lower tax rates = good, particularly for companies that are very capital intensive.

 

We will see what the deal is but I wouldn't necessarily be happy about it if I was a Berkshire shareholder. I think it's too early to tell what the net effect will be for a company like Berkshire. For many companies it may be very good. It may even be good for Berkshire. I just don't think we should be celebrating a reduction of deferred taxes that will never be realized if it means taxes currently payable goes up.

[John Hjorth]

Scott,

 

Yes.

 

My intention with my post referring to the Bloomberg acticle was just to back my first post about deferred taxes - just showing that others look at this the same way as I. My first post was actually meant to be only about what would happen to deferred taxes already built up and provided, which was not clear based on how my first post was phrased. So I have edited my first post.