The tax effects of individual tax law changes are more immediate. The benefits from lower tax rates can be gained almost immediately in revised tax withholding tables that put more money in the pockets of consumers.
The tax effects of business tax law changes take longer to filter into the economy. Many of these effects are tied to capital allocation decisions. Where is it most advantageous to invest our capital? Where should we build a manufacturing plan or service center? Where is our capital going to get the best potential return?
These decisions are not made quickly. It requires financial analysis. It also requires consideration of the supply chain, labor markets and other factors. Taxes are not the principal driver of business decisions. However, they become very important at the margin. I can speak with some authority on this subject having been Corporate Director of Taxation for a Fortune 500 company for a number of years.
The tax bill signed by President Trump in December, 2017 reduced the corporate tax rate to a flat rate of 21% from a previous top marginal rate of 35%.
Previously, the United States had the highest corporate tax rate among the major industrialized countries in the world. The new rate makes U.S. corporations much more competitive on this score. Although not shown in the chart below, China has a 25% corporate tax rate but it is only 15% for industries encouraged by the Chinese government (e.g new/ high tech enterprises and certain integrated circuits production enterprises).
 |
| Credit: Rakuten Super Logistics |
The new tax law also changed the U.S. tax system from one in which the worldwide income of U.S. corporations was taxed wherever it was derived to one which only taxes income earned within the United States.
However, the U.S. tax was only levied when profits were repatriated to the United States. In order to avoid being taxed on these profits (which had already been taxed overseas) U.S. companies avoided bringing this money back to the United States due to the high corporate tax rate in effect.
The new law removes this disincentive to leave this money overseas and also provides a one-time tax of 15.5% on the repatriation of any prior accumulated earnings that would have once been at risk of being taxed at the prior 35% tax rate.
It is estimated that there were some $3 trillion in assets parked offshore by U.S. companies who had earned it previously in foreign countries before the tax law was passed.
This is a chart that shows the amount of repatriated earnings into the USA by quarter going back to 2003.
Do you think the new tax law had anything to do with what happened in the first quarter of 2018?
 |
| Credit: Federal Reserve Bank |
The flow of repatriated dividends per quarter in 2018 slowed after that but a Bureau of Economic Analysis report through the third quarter indicates almost $600 billion in money had already flowed back into the United States this year as a result of this tax law change. Fourth quarter amounts need to be added to this.
That is quite a bit short of the estimated $3 trillion in accumulated foreign profits but undoubtedly a lot of those assets are illiquid. The earnings in those foreign countries was reinvested overseas due to the disincentive to bringing the money back to the United States in the prior law. This obstacle has now been removed.
As I said before, it takes more time for business tax law changes to be felt but the long-term impacts of this change is just now starting to be felt.
For example, consider this story by the New York Times about Apple from last December. Apple happens to be the U.S. corporation that had the most earnings parked overseas---$285 billion.
Apple said Thursday that it would build a new $1 billion campus in Austin, Tex., where it could eventually employ 15,000 people, amid a broader expansion that will create thousands of jobs in several American cities.
The company, which has 90,000 workers in the United States, also plans to open 1,000-worker operations in San Diego, Seattle and Culver City, Calif., and add hundreds of employees in offices in New York, Pittsburgh and Boulder, Colo., in the next three years.
A friend of mine who is a tax attorney and works on many international tax transactions sent me the Times article shortly after it was published along with this comment.
Lower corporate tax rates in the US means more plants and jobs in the US and fewer in places like Ireland and Puerto Rico. This is just the beginning. Wait till pharma companies start bringing their plants back here.
He believes we are going to see more of this. The trend is just beginning as a result of the tax law change for corporations.
Here is another chart that I came across that provides support to that view. It shows direct investment by U.S. companies abroad and investment in the the U.S. by foreigners. Notice the change in direct foreign investments right after President Trump signed the new tax bill into law.
What does all this say?
President Trump has set in motion some economic forces that could have very beneficial effects for the United States over the long term.
In his campaign for President, Trump talked a lot about bringing manufacturing plants and jobs back to the United States.
Yes, there are still a lot of challenges out there and tax policy is just one of many factors that figure into economic development growth.
However, we are in a much better position to compete in the global economy than we were a few years ago. We are already seeing manufacturing jobs come back that a former President told us would never return. In fact, Barack Obama said that Donald Trump would need a magic wand to fulfill his job promises.
Investors' Business Daily reported that in Trump's first 21 months in office, manufacturing job growth in the Trump economy was 10 times what it was in the last 21 months of the Obama economy.
Is that a magic wand in Trump's hand?
 |
| President Trump signing tax bill into law, December, 2017 Credit: Politico.com |
What could go wrong?
This woman and her friends are high on the list.
They don't create jobs with wands, they kill them with tweets. Amazon quickly ran the other way with their 25,000 new jobs and $30 billion of revenues for the New York metro area when AOC started castigating them.
Buyer (and) voter beware.
No comments:
Post a Comment