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A 28% Tax Rate Will Cost Companies, but Not Equally

Change winds could be coming on the tax front.
(Funtap)
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President Joe Biden is proposing a rise in the corporate tax rate from 21% to 28%, WSJ reports.

Why It Matters: Increasing taxes, which wouldn’t kick in until January, would “cut into corporate profits as the economy recovers, and the Biden plan could reduce the earnings of companies in the S&P 500 by at least 10%, said accounting analyst Dave Zion of the Zion Research Group.”

  • Companies who earn a large chunk of their money domestically would be directly affected, while multinational ones are “likely to focus more on the changes to the minimum tax on foreign income.”
  • Stock prices already somewhat account for the changing tax climate. Coupled with resistance from Republicans and moderate democrats, a more realistic goal might be 25%.

Back Then: Prior to the overhaul of the last administration, the U.S. corporate tax rate was 35% in 2017, and many companies pay a lot less after deductions and credits.

Arguing For: “Supporters say the tax increase cannot be looked at in isolation. Domestic companies and American workers stand to benefit from the Biden administration’s proposal to spend more than $2 trillion on infrastructure and other improvements, said Matt Gardner, a senior fellow at the progressive Institute on Taxation and Economic Policy.”

  • Retailers would likely be most affected by the changes, but it’s key to remember that those suffering most from the pandemic would only be shelling out tax dollars when they carry a profit.

Who Wins: “A higher tax rate would cost some companies more than others—essentially, the same firms that benefited most from 2017’s corporate-rate cut. That includes utilities, regional banks, many retailers and other companies that sell goods and services primarily in the U.S.”

  • Big multinational companies paid 8.8% in taxes on worldwide income in 2018, a decline from 15.8% in 2017.

The Outlook: Any tax reform is likely to be a watered-down version of Biden’s campaign promises, and for most big companies, a small tax-hike is “unlikely to be dramatic.”

Justin Oh:

This infrastructure bill and corresponding tax increases can definitely be net beneficial to the economy and stocks, if the money is spent wisely. 

In general, I think there are a lot of value-additive initiatives in this spending bill, especially the parts that promote economic activity and industry. But true economic activity and productivity needs to be stimulated by more than the “10%” long-term reduction in corporate earnings in order for this to be net beneficial to the country.

Please refer back to here and here for my full thoughts, as well as watch our live stream from last week where we discussed this in depth.

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