Lower Corporate Taxes and long run EBIT Margins

[LongHaul]

Anyone have have any thoughts/opinions/experiences on whether US companies will keep any portion

of the lower corporate tax rate vs how much will be passed on to consumers?

[rb]

I'd say that the companies will keep most of the lower corporate taxes.

 

Most of the tax cuts would be competed away and passed to the consumers under a system of perfect competition. However under a system of perfect completion most companies' valuation would be book value. But that's not what you see out there in the world. In fact we're pretty far from that.

[Jurgis]

Yes, it seems that companies have learned the lesson of (im?)perfect capitalism: screw free markets, screw supply and demand, price wars are for wussies only, keep prices high (and executive compensation higher).

 

Dis iz good for shareholderz, ya?  8)

[SHDL]

Like rb said, the theory is that this depends on the mode of competition.  So at one end of the spectrum you have pure commodity businesses with no market power at all, and one should expect those guys to have a hard time keeping any of the tax benefits.  At the other end of the spectrum you have (near-)monopolists who should have a relatively easy time keeping most if not all of the benefits. 

 

So the rich get richer and the poor get poorer, not just between capitalists vs others, but also between owners of good vs bad businesses. 

 

BTW, a related but different question is:  Is it really safe to assume that the Trump tax cuts are permanent?  Personally I’m super skeptical, although I’d be delighted to be proven wrong.

[LongHaul]

Has anyone seen or heard of companies lowering prices/margins due to the lower tax?

The only thing I heard was a utility lowering rates a bit.

 

I think the competitive industries will largely have to lower prices with the lower tax rates.  The less competitive industries and companies may keep them longer.  Hard to say.

 

 

I think there is a good chance that corp rates stay low in the US as much of the rest of the world has low corp rates.

I would expect personal tax rates to go up with the huge deficit in boom times though.

[Jurgis]

https://www.nytimes.com/2018/11/25/opinion/monopolies-in-the-us.html

 

Somewhat interesting graph about monopolization of business. (Yeah, some of the data is a bit misleading, but that's for observant to notice.)

Even some "commodity" businesses are no longer very competitive, but rather oligopolies. Like Buffett observed too.

[SHDL]

Has anyone seen or heard of companies lowering prices/margins due to the lower tax?

The only thing I heard was a utility lowering rates a bit.

 

I think we’re seeing some margin compression going on in the retail space, though I can’t tell you how much of that is driven by the tax cut.  Given the macro backdrop, I imagine much of this is happening behind the scenes through an inability to raise prices in the face of rising costs as opposed to outright price reductions.

[RichardGibbons]

Has anyone seen or heard of companies lowering prices/margins due to the lower tax?

 

MGIC put out a press release a while back claiming that they were lowering rates because of lower taxes.

[rb]

Has anyone seen or heard of companies lowering prices/margins due to the lower tax?

The only thing I heard was a utility lowering rates a bit.

 

I think the competitive industries will largely have to lower prices with the lower tax rates.  The less competitive industries and companies may keep them longer.  Hard to say.

 

 

I think there is a good chance that corp rates stay low in the US as much of the rest of the world has low corp rates.

I would expect personal tax rates to go up with the huge deficit in boom times though.

Yea, all utilities will have to lower rates. It's baked into the formula.

 

I also agree with the view around the fiscal issue. The have to close the gap by at leas 2% of GDP. The republican fantasy is that they'll do it through cuts to Medicare and Social Security. But that just ain't gonna happen. So taxes go up. But yea I don't think they'll make up all of it through corp taxes. I think that they'll pass some monstrous tax package that's a million pages long that will basically nick everything a little bit to make up the amount needed.

[LongHaul]

Has anyone seen or heard of companies lowering prices/margins due to the lower tax?

 

MGIC put out a press release a while back claiming that they were lowering rates because of lower taxes.

 

Thanks for posting this.  Interesting because I would imagine that almost all of insurance is very, very price competitive and it sounds like MGIC competition also lowered rates to reflect the lower US corp tax rates. 

[Jurgis]

Capitalism is dead, long live monopolies (and investors?):

 

https://www.bloomberg.com/opinion/articles/2018-11-25/the-myth-of-capitalism-exposed

 

 

[Cigarbutt]

Capitalism is dead, long live monopolies (and investors?):

https://www.bloomberg.com/opinion/articles/2018-11-25/the-myth-of-capitalism-exposed

Mr. Tepper's book has been on the to-buy list but was under the impression that it may have been based on an idea (ideology?) looking for facts.

 

From some data, it appears that the lower corporate taxes have been financed with unsustainable debt in order to mostly fund buybacks of overvalued stock. Apart from exceptions, lower taxes have not been passed on (or trickled down to) the capital-scarce end user.

 

In the article you refer to, there is a quote from Chesterton who lived during the Gilded (and not golden) Age. The context of the quote is richer in meaning:

"For that is true of pedigree which is true of property; the wrong is not in its being imposed on men, but rather in its being denied to them. Too much capitalism does not mean too many capitalists, but too few capitalists; and so aristocracy sins not in planting a family tree, but in not planting a family forest."

 

Lower taxes is a winning argument until proven otherwise but it seems to be exacerbating a trend that the Gilded Age eventually showed to require, absent appropriate adjustments, a Great Reset.

 

Don't you think Jurgis? 8)

[wachtwoord]

Can you link me to the gilded age (I had to look up the term, only knew the European equivalents belle epoque and Victorian) reset information?

[Jurgis]

Capitalism is dead, long live monopolies (and investors?):

https://www.bloomberg.com/opinion/articles/2018-11-25/the-myth-of-capitalism-exposed

Mr. Tepper's book has been on the to-buy list but was under the impression that it may have been based on an idea (ideology?) looking for facts.

 

Perhaps. Though I think he's not the only one remarking about elevated corporate margins, oligopolies and monopolies.

 

It's possible though that even with apparent monopolization of various industries the present is not (much) worse than the past. Perhaps even better in some ways. E.g. taking the airline example, the competition in Europe (and somewhat US) from budget airlines is way higher and the prices are way lower than what was there during the time of flag carriers (AFAIK).

 

From some data, it appears that the lower corporate taxes have been financed with unsustainable debt in order to mostly fund buybacks of overvalued stock. Apart from exceptions, lower taxes have not been passed on (or trickled down to) the capital-scarce end user.

 

In the article you refer to, there is a quote from Chesterton who lived during the Gilded (and not golden) Age. The context of the quote is richer in meaning:

"For that is true of pedigree which is true of property; the wrong is not in its being imposed on men, but rather in its being denied to them. Too much capitalism does not mean too many capitalists, but too few capitalists; and so aristocracy sins not in planting a family tree, but in not planting a family forest."

 

Lower taxes is a winning argument until proven otherwise but it seems to be exacerbating a trend that the Gilded Age eventually showed to require, absent appropriate adjustments, a Great Reset.

 

Don't you think Jurgis? 8)

 

Not sure what you expect "a Great Reset" to be, so I can't answer. IMO it's very hard to predict the future.

 

Edit: Just in case some people missed it, here's the link to part 2 of the article: https://www.bloomberg.com/opinion/articles/2018-11-26/tech-monopolies-strangle-economic-growth

The author does provide some numbers substantiating his thesis of monopolization trend. He does jump around a lot and some of his examples are anecdotal and self-contradictory, but perhaps that's because he tried to condense the book into two articles.

[Cigarbutt]

The intention is not to derail the topic initiated by LongHaul.

Opinion: the corporate tax is not being passed on to the consumer.

 

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@Jurgis and watchwoord

This is not about expectations or The Future, which is unknowable, but more about an obsession in being prepared for all the potential futures.

 

Summary: The theme is related to what Mr. Ray Dalio talks about when he sees a correlation between wealth and business interest concentration AND the rise of populist movements and divided politics.

https://www.marketwatch.com/story/the-next-financial-crisis-will-threaten-capitalism-and-democracy-ray-dalio-warns-2018-09-13

Nobody knows the future but the price of inaction can be high.

-----

 

Back to topic.

 

[Jurgis]

I disagree with Cigarbutt: the topic was (is) dead, so I'd rather post and discuss related material here than create a new thread.

[rb]

Can you link me to the gilded age (I had to look up the term, only knew the European equivalents belle epoque and Victorian) reset information?

This thread isn't in the politics section, so this is all from a historical perspective and let's leave it at that.

 

The Guilded Age refers to a historical period in America, not globally. It was during the latter part of the 1800s. The Belle Epoque in Europe overlapped the Guilded Age. However the Belle Epoque went on for longer (until 1914?) whereas it is clear that the Guilded Age was over by 1900 in the US. The Guilded age was marked by income inequality and its most defining feature were the giant Trusts.

 

The great reset was the period that followed - the Progressive Era. You can safely say that the progressive era started with Teddy Roosevelt becoming president. Though one can make an argument that it stated with the passing of the Sherman Anti-Trust Act. This period was marked by trust-busting, increased regulation, increased labour protection and unionization, increased environmental protection and conservationism.