Tax Reform: Be Careful What You Wish For

Tax reform! That has been the cornerstone prize the Trump administration has promised since day one. And the lure of tax cuts for big business has been a big contributing factor to the stock market’s 24% gain since last year’s election.

But now the tax plan working its way through Congress doesn’t look all that great for big business. In fact, in its current form, the plan would result in a tax hike for many corporations!

Big multinational companies including Apple (AAPL) and General Electric (GE) would face as many as three new taxes amounting to $454 billion in new tax revenue over the next 10 years, according to analysis by Bloomberg.

Many companies would end up with a higher tax rate than their current effective rate.

As for the estimated $3 trillion in corporate earnings that are held offshore, the plan would tax those profits at rates as high as 12%, generating another $223 billion in revenue. So much for the repatriation tax break companies like AAPL, Microsoft (MSFT), Alphabet (GOOGL) and many others were looking forward to!

Plus, the plan in its current form is not exactly “revenue neutral” as Beltway politicians promised. In fact, the business tax cuts add $1 trillion to the deficit over 10 years.

And while the average American family would get a tax cut of about $3,500 … over a 10-year period, the national debt would grow by $4,644 per person over the same period!

New taxes on royalty income and on companies that earn “high returns” from offshore affiliates amount to an additional $231 billion tax bill. In fact, businesses that enjoy some of the highest profit margins face a higher overall tax rate, according to a spokesperson for accounting firm KPMG.

All is not lost however, thanks to well-paid Beltway lobbyists who are now working overtime to get their pet tax breaks restored.

Many industries that have branch offices for lobbyists in Washington, D.C., including the drug industry, homebuilders and even the National Federation of Independent Business (NFIB), have already expressed concerns about the plan. The NFIB even said it was unable to support the Republican proposal in its current form.

And the U.S. Chamber of Commerce weighed in on the tax plan by noting “a lot of work remains to be done to get the exact policy mix right.” Let the lobbying begin!

Bottom line: In the sausage-factory that is Washington, D.C., a LOT can happen before the tax plan becomes law. But for investors who were counting on tax breaks to keep propelling stocks higher, this could very well be a “buy the rumor … sell the news” event. That’s especially true if the long-awaited tax cuts end up being much less than expected.

Good investing,

Mike

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Comments 12

  1. Ernest Mink November 6, 2017

    I like the tax reform. It is right on. The best ever. I love President Trump. If big business makes a lot of money, they can afford to pay taxes. The middle class and poor need the tax cuts the most. But I seriously doubt big business will lose out at all. Quit listening to the mainstream fake news. By the way CEOs already make too much money! No one needs 84 million a year! There is a great way to raise minimum wage right there. Quit overpaying CEOs and greedy shareholders! There is crony capitalism, that is just as bad as socialism/communism!

    Reply

  2. f151 November 6, 2017

    This plan will have a long road thru Congress. I hope at least SIMPLIFICATION is achieved — the existing miasma/code is a National Disgrace of 75,000 pages that NO ONE understands.

    Finally…I wish the industry LOBBYISTS would stay out of the process. Did you figure in possible additional growth in your analysis?

    Reply

  3. Andrew November 6, 2017

    Congress needs to forget all this “tax cut”, “tax simplification” crap. It is a waste of time and energy.
    What we need are ONLY TWO things. If they can do that for a decade, then look at other stuff.

    1. ELIMINATE the “foreign profits” tax. That money is never coming back unless it is NOT taxed at all.
    2. REDUCE SPENDING.

    Just REDUCING spending will bring the Feds inline with reality and that will be good for everybody EXCEPT the bureaucrats.
    Getting the corporate money parked overseas back in the USA will increase spending in the USA and that will increase government tax revenue, further reducing the deficit (or maybe we let them have it to spend.)

    Of course this is too stupid simple to do.

    Reply

  4. Ken Weaver November 6, 2017

    Not good for Big Business?
    1. Lowers the TOP TAX RATE from 35% to 20% ….. HELPS BIG BUSINESS
    2. Changes “Expense Rules” …. Faster Expensing ….. HELPS BIG BUSINESS
    3. Repatriation Tax at 5% from Current ….. BIG WINDFALL for BIG BUSINESSES

    You must be part of “the swamp” and don’t see the GOOD THINGS ….. Yes, they could do “much better” if they had some “cajones” but SOMETHING NEW IS BETTER THAN THE SAME OLD PENALIZING CORPORATE TAX CODE.

    Get with it guys and stop spreading “spin”.

    Reply

  5. Martin November 6, 2017

    Mike:

    What is the basis for your comment that “the plan would result in a tax hike for many corporations”? I have not heard anyone else make this comment and I find it hard to believe that highly profitable companies like Apple and Google will pay more in taxes with the rates being reduced by 10% to 15%. This does not seem to make sense. Also, how is a 12% repatriation rate not a huge tax break for companies when these profits would otherwise be taxed at some 34% today. Sounds like you just don’t want to give Trump credit for doing something good for our economy.

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    • Informed American November 6, 2017

      Many people have pointed this out. As a retired controller for two international corporations I can tell you from experience that most large corporations use hundreds of legal tax shelters to reduce their effective rates, many well below 20%, with a significant number paying zero. If you ever see Donald Trumps tax returns you will probably see an extreme example of legal corporate and pass through tax abuse. Depending on the details regarding those loop holes, many and possibly even most companies could see increases. I am not saying that’s bad, they should be paying something to support the countries where they operate, but if your counting on a huge increase in corporate profits to drive up your stock values or dividends you may well be severely disappointed. As far as reduce repatriation taxes, they are not paying anything now, that’s why the money is offshore. They won’t want to pay the 12% either so the money will likely never come back. Trump always sells people willing to trust him a bill of goods. Ask his suppliers, contractors, municipalities Informed and former investors who he left holding the bag in his multiple bankruptcies.

      Reply

      • Polly November 8, 2017

        I’m not sure why you think companies will not bring money back to US. The fact is in 2004, the United States Congress enacted such a tax holiday for U.S. multinational companies in the American Jobs Creation Act of 2004 (AJCA)) section 965, allowing them to repatriate foreign profits to the United States at a 5.25% tax rate, rather than the existing 35% corporate tax rate. Under this law, corporations brought $362 billion into the American economy. I know the company that my husband works for will be more than happy to bring money back to US for more useful purposes than purchasing useless companies oversea just to make use of the capitals they have outside US.
        However, I do agree what you said about certain companies will not benefit. The two companies mentioned in the article are the biggest tax dodgers — GE has effective tax rate of 0%, and Apple was found to have an enormous tax shelter (and being sued in EU) based on recently published “Paradise Papers”. Both are quite disgusting companpies that make people hating capitalism (they are actually practicing crony capitalism).

        Reply

  6. John Shelton November 6, 2017

    Wait a minute Mike, you’re telling me that the big Corps could be taxed at a rate as high as 12% on repatriated funds? The BILLIONS of dollars they are hiding overseas?? Isn’t that a Govt. gift when compared to the 35% tax rate they would currently have to pay – the reason they have that money stored overseas? Even if they do bring it home there is little to no chance they will use it to build factories or expand jobs to any great degree. It will be used for dividend boosts and stock buy backs putting more value and cash in the hands of the 1% crowd.

    Reply

  7. Beth November 6, 2017

    This is not at all what many other media outlets report. There have been many reports that big corporations face a 10% decrease on taxes. So I’m really surprised to hear you say this. It’s getting so we can’t trust anyone to report the truth any more! I don’t know who to believe at all any more.

    Reply

  8. Gary C November 7, 2017

    The tax reform plan is going to raise the deficit by $1 trillion? Hooray- that’s a $9 trillion improvement over the last 8 years. Or maybe we should just leave the tax plan as is? – clearly that’s having an extremely positive effect on the economy and businesses- we’ve been told repeatedly that 1-2% growth is the “new normal” and is just fine. Besides, why would anyone in Washington ever want a taxpayer to keep more of the money he earned?

    Reply

  9. Helen November 12, 2017

    If the state income tax and other local tax deductions are limited in corporations as well as individuals, then it will be a tax increase for many corporations if they are located in a state that has high income tax and/or property taxes. That’s probably what they are talking about.

    Reply

  10. Mark H November 14, 2017

    Lobbyist attorneys draft legislation for us, why do we need Congress? They are operating the largest racketeering syndicate in history. President Trump is the only threat to their corruption.
    Term limits
    Ban political parties in government
    Outlaw lobbyist, bribery, racketeering
    Election by lottery for qualified citizens
    Stand alone legislation
    Repeal Federal Reserve Act of 1913, reclaim our currency
    Engineer removal of money from politics, removal of politics from government
    Reduce size, scope of government by 75%
    Eliminate IRS, DEA, DOE, EPA and all the rest
    Slash spending, waste, fraud, corruption
    Zero income tax, sales tax can fund lean government
    Stop the “War on Drugs”, unconstitutional, destroyed fabric of society, killed 1 million+ worldwide, medical issue
    Our “elected public servants” are mostly corrupt, career criminals, con artist whose primary function is racketeering. Borrowing hundreds of billions a year to give to special interest for pennies on the dollar in kickbacks results in 20T in debt, expansion of wage/wealth, decline of middle class and stolen misdirected taxpayers treasury. LOCK THEM ALL UP!

    Reply