Lots of news coming off the Hill today with regards to Trump's new tax plan. Hopefully we'll get some kind of announcement by the end of the day.
With the acknowledgement that 1) we don't know exactly how the plan is structured, 2) we don't know how it would be paid for, and 3) we don't know if it will have enough support to pass, I'm curious at everyone's thoughts on the hypothetical of a US-wide 15% corporate tax rate.
Positive impacts? Negative impacts? Will US-based multinationals repatriate funds in a fit of glee? Will I get a cut of the action, from rising stock prices to general economic growth to wage increases? Does anything matter, really, at the end of it all?
Thoughts invited and appreciated.
It won't happen. Like many of Trump's "proposals" (border wall, healthcare reform, labeling China a currency manipulator, NAFTA withdrawal) it is media bait bullshit.
thx
If it "hypothetically" passes we'll have companies spend the repatriation cash on mergers (which cut jobs) rather than capital investments (which create jobs). Admittedly, small businesses will get a huge boost. Our deficit will increase, a lot. They're bullshit growth assumptions that basically amount to "I'll write a big check and earn the money to afford that big check later" will likely not come to fruition.
Lower Corp Tax Rates (Originally Posted: 12/02/2017)
If tax rates decrease, won't this be bad for banks in that banks rely heavily on debt financing by borrowing from other banks. As debt interest repayments are tax-deductible, lower tax rates mean that they will have less tax-deductible expenses.
Overall though, lower tax rates will be good but is that a valid con of lower corporate tax rates?
It's hilarious to me that he wants to tax pass through entities at the corporate rather than the personal income rate. Time for all employees to start receiving their wages as consulting fees through LLCs!
What's interesting about this is that this would trigger an absolute need for a universal healthcare type program. But, I am 100% certain that democrats won't see this possibility at all to get something they want.
...because?
There would not be enough tax revenue to pay for it.
yes but the lower tax rate is far more beneficial than these foregone tax-deductible expenses
Can you explain this? Wouldn't the corporation and LLC be taxed at the same rate?
Corp tax rate lower than personal. So you can not pay yourself a salary so to speak and just get the revenue ie salary pass through to your net income for your LLC. Then you pay the LLC rate of 15% not personal rate which is higher.
Corporate Tax Rate affecting Middle Market firms (Originally Posted: 01/18/2018)
Hi just want to clarify a quick concept. Does the new corporate tax rate apply to the Middle Market firms a MM PE shop would buy? So now those firms should be more profitable, correct?
I think this can actually stand a chance of passing if congress can come to some kind of agreement about a required percentage of tax savings going to employees. Say if corporations end up saving 7% after the closure of loopholes if 50% of that savings was required to be used to increase wages or boost hiring Trump could get this done and actually boost tax receipts to the treasury as it is likely corporations are paying less in taxes now than that 7% loss would cause if half of it went to increased payroll taxes via increased wages, yes I know that not 100% of it would go to taxes.
"If congress can come to some kind of agreement"
That will never happen. The GOP couldn't get their shit together and agree on a healthcare plan after 8 years of bitching and moaning. Think about how few special interests there are in relation to the ACA. Think about the percentage of the population that would actually be directly effected by the ACA changing. Now think about the special interests related to the tax code. Now think about the percentage of the population that is impacted by tax code (spoiler alert its 100%).
If the GOP couldn't pull it off on healthcare what makes you think they can navigate tax reform?
That is correct. However, the incentives to borrow have been curtailed. The amount of interest that can be deducted from pre-tax income has been capped at 30% of EBITDA through 2022, after which it will be 30% of EBIT. This increases the after tax cost of debt for companies paying anything more that a blended average of ~5% on a debt level greater that ~6.0x EBITDA (i.e. high yield). As such the 35% (now 21%) that was being saved as a result of the tax shield on high yield debt interest payments is now going to be added to each highly levered companies tax bill.
Thanks very helpful.
What about the ability to make CapEx deductible in the same year? That's got to change how PE uses depreciation / EBITDA right, I'm assuming.
The breakeven is 58% of EBITDA if 0 D&A. Set up an equation and set both sides to equal each other.
Where x = EBITDA and y = interest rate; where y>=.3x; assumes no D&A
(x-y).65 = (x-.3x).79 - (y-.3x)
Gotta love the Trump hate.
Cutting Corp taxes is a good thing. They only pass costs through to consumers who ultimately pay thfor tax. Congress is worthless and will do nothing. At least Trump is trying.
He also got a tariff on milk and soft lumber, helping out NYS farmers. Schumer is supportive. Shows Trump is trying to cross the isle.
Nothing wrong with cutting the corporate tax rate, as long as that is the floor and no loopholes can lower a companies' effective rate. Trump should try and bring a plan forward that actually has a chance to pass, u know, like a smart politician working within a democratic republic. His lumber and milk tariff was showmanship bullshit and ofc Schumer supports it, congressmen consistently support shit that helps their state, regardless of whether it is beneficial for the nation or not.
Funnily enough, US companies were getting a one-sided bargain for lumber and dairy products. Canada supplying the US was cheaper for American firms.
The corporate income tax is an utterly counterproductive tax since the income would get passed into capital investment or to the investor(s), both scenarios which would produce tax revenue for the government anyway. The corporate income tax rate should be 0%, but moving it to 15% will definitely increase U.S. capital investment. My company is structured as an LLC, but we want to re-incorporate into a C-corp to make it easier to raise venture capital and to hold retained earnings at the corporate level, but we have been holding off due to the obscene corporate income tax rate.
It's not a silver bullet, but since the U.S. has a large trade deficit we should be doing everything we can to make up for it in spades through foreign capital investment (which we already do, but why not make ourselves even more competitive?).
This assumes that most companies a.) don't have access to capital in order to make positive NPV investments b.) they actually pass capital to investors instead of making negative NPV investments, enriching executives, or hoarding cash c.) they invest the capital we don't tax in a way that benefits the United States rather than investing in foreign markets
Even if most companies have access to capital, why not give them access to more capital?
In almost every scenario, even one pitched as "negative" (i.e. hoarding), tax revenue is still generated. If you hoard cash at a bank, due to fractional reserve banking that money gets used for lending. This actually harkens back to my point that lowering the corporate income tax rate isn't the singular silver bullet for the economy; for example, the federal government and the federal reserve have (overly) tightened lending standards for small businesses (i.e. there is an under-supply of debt capital for small businesses due to federal rules). Lowering the corporate income tax rate is one of many reforms our economy needs to generate 3-4% GDP growth.
Again this returns to my position that corporate tax reform isn't the silver bullet. We need to make doing business in America more enticing than doing business overseas.
C'mon now man, you work in the industry.... in order:
a.) don't have access to capital in order to make positive NPV investments
rebuttal: Lower taxes by mathematical fact increases the number of NPV investments available to corporate investors. All else else equal, this will result in greater capital investment in aggregate as well as capital gains for their investors (see definition of NPV positive), which will generate taxes.
(Gonna break this one up, since you managed to cram several things I disagree with together)
b.) they actually pass capital to investors instead of making negative NPV investments, enriching executives, or hoarding cash
rebuttal 1: As a point of order, this overall statement is incorrect - @Dances with Dachsunds actually only assumes that the % share of the marginal capital investment generated by lowering the tax rate diverted to these activities will be be similar to the current levels. To ditch the econ jargon, he's just assuming that corporations aren't going to get worse at creating shareholder wealth just because they're given more $$$. That's very different than assuming there will be zero 'waste'.
rebuttal 2: Regarding the comment on negative NPV investments --> a) to my knowledge, there is no academic evidence that supports the conclusion that a lower corporate tax rates increases the % of NPV negative investments made by corporate executives and b) as a matter of mathematical fact, (repeating my rebuttal on the first point) lowering the the corporate tax rate increases the number of NPV positive investments available and (this is the new part) further decreases the attractiveness of an NPV negative investment (since any potential tax benefit is now worth less).
rebuttal 3: ...enriching executives --> who pay income tax rates of 39.6% (assuming they make $400k/year). Just to be perfectly clear, since this is higher than the current average corporate income tax and the personal income tax rate for dividends or capital gains, this implies the government would actually come out ahead if corporations took 100% of their newfound earnings and 'enriched executives'.
rebuttal 4: ....or hoarding cash --> first of all, this is all being done to motivate firms such as APPL to repatriate (i.e. stop hoarding) cash. Secondly, it's highly unlikely that shareholders would be okay with 100% of the incremental earnings generated just sitting on the balance sheet, especially since (to say it one more time) investing the money would be more attractive than ever!!
c.) they invest the capital we don't tax in a way that benefits the United States rather than investing in foreign markets
rebuttal 1: Assuming their foreign investments are NPV positive, why wouldn't that benefit the US? At minimum, it would create capital gains for their US investors.
rebuttal 2: Isn't this the exact concern we all make so much fun of Trump for having (e.g. globalists are outsourcing and fucking the little guy)?
This is great, but it means nothing unless government spending is also drastically cut, which I doubt will happen since it would require Republicans to agree to "defence" spending cuts. Ignoring Trump, I am amazed at how unproductive the Republican-controlled congress has been. Due to the unprecedented incompetence we've witnessed (from the Republican-controlled congress), I think this period is going to be remembered as a failure and complete loss of opportunity.
The congress has been unproductive and incompetent for quite a while.... crossing party lines... not sure how that is unprecedented.
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