Massive Change to the U.S. Tax Code Expected to Boost Corporate Investments
Tax reform in the U.S. has always been a sensitive subject. In a country in which the tax code requires more than 70,000 pages of guidance, adjusting this delicate balance of rates, brackets, deductions, credits and exemptions will almost certainly result in mixed feelings for different groups. However daunting the task, the ultimate goal of the Trump administration is to reduce the overall federal tax burden, and in turn stimulate both individual and corporate spending.
President Donald Trump reiterated these goals in a speech he gave last week.
"When government loses its grip, there is no summit we cannot reach," he said. "Our tax cuts will break down all forms of government barriers and breathe new life into the American economy."
House and Senate leaders attempted last week to reconcile the differences between the House and Senate versions in order to iron out the final provisions of the reform measure, with the goal of putting it to a final vote as early as this week.
Some of the major provisions and their potential results for businesses are as follows.
One of the primary changes is the available repatriation of nearly $3 trillion in overseas profits back into the U.S. These earnings would now be taxed at a much lower rate of 5-12%, hopefully enticing companies to bring that money home and reinvest it domestically. The pivotal question looming over this provision is whether it would translate into increased capital expenditures and job creation in the near-term.
Another highly significant item is the reduction in the corporate tax rate from 35% to 20%. Although the current effective rate actually sits at around 29%, experts believe that it would effectively land at 21-22% under the reform bill. This should free up quite a bit of cash flow, enabling companies to make investments and take on projects that have been in queue for some time.
Industrials, in particular, do stand to gain from the proposed changes. This sector has large amounts of profits stranded overseas and also pays some of the highest corporate tax rates. However, the renewable energy segment may have reason to be nervous, with credits and incentives for solar power and electric cars being revisited.
If the markets are any indication, investors appeared to be buying into the idea that this plan will in fact stimulate the economy. Stocks inched higher on Friday, as the plan moved toward finalization.
If passed, the tax reform would be the Trump administration's first major legislative victory. Changes would begin to be implemented in January. It will also mark the most changes made to the U.S. tax code in more than three decades.
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