Many economists believe the Tax Cuts and Jobs Act benefits corporations over individual taxpayers. You may have even heard financial news channels praising the benefits of corporate taxes. The theory is that the lower tax rates will push corporations to invest more in the United States by raising wages, increasing jobs, and expanding operations and capital expenditures, which would unleash unprecedented economic growth.
To begin, The Tax Cuts and Jobs Act, permanently replaced the graduated corporate tax rates that ranged from 15% to 35% with a flat corporate rate of 21%. Furthermore, the tax reform law repealed the 20% corporate alternative minimum tax, which ensured that corporations paid at least some taxes. The repeal allows companies to use loopholes, tax breaks, and write-offs to lower their effective rate below the new 21% flat rate.
With change alone, we’ve seen many corporations pass along their savings to their employees. AT&T announced, shortly after the reform was made law, it would pay a one-time $1,000 bonus to more than 200,000 employees. Banks Fifth Third Bancorp and Wells Fargo both reported raising their minimum hourly pay companywide. Moves like this certainly put more money into the hands of consumers.
The Tax Cuts and Jobs Act, permanently replaced the graduated corporate tax rates that ranged from 15% to 35% with a flat corporate rate of 21%
However, on the other end of the spectrum, we see plenty of corporations claiming they will take a tremendous tax hit because of the repatriation of profits. Under the previous tax laws, American companies owed federal income taxes on their worldwide profits, regardless of where they were generated; however, they could indefinitely defer the taxes on profits earned overseas, as long as those profits stayed overseas. The Tax Cuts and Jobs Act changes that: Companies will have a tax liability between 8% and 15.5% on overseas earnings since 1987. American companies are said to have more than $2.5 trillion in overseas assets. However, the law allows corporations to pay this “repatriation tax” over an eight-year period. That could bring in $200 billion to $300 billion in taxes over the next several years. Going forward, income earned abroad will be subject to federal income taxes of 10.5% or less.
Corporations based in the United States with cash locked up outside our borders should benefit from being on a more even playing field with their international peers headquartered outside the United States, but this doesn’t mean corporations will spend the newly-freed cash on capital projects. Companies have not been starving for the cash needed to buy new businesses, invest in new projects, or launch a new round of research and development. They seem to have been more interested in taking less risk and getting easy returns. Low-interest rates have allowed companies to borrow on the cheap and buy back their own shares, even at what seem to be bloated prices in some cases.
Another feature of the Tax Cuts and Jobs Act is accelerated depreciation. In the past, we’ve seen accelerated depreciation used when the economy is soft to jump-start spending to get out of a recession. This time we are far from a recession, so it will be fun to watch how it plays out. The government has structured depreciation so that a small firm can buy a vehicle, equipment or other asset and write it off 100% in the year of purchase. If there is something a small business has been meaning to upgrade or buy in order to expand, they are more likely to invest their money into their business than to pay more to the government in taxes. Therefore, we believe we’ll see more capital expenditures.
Will this tax law unleash unprecedented economic growth? The key will be how they—both the government and corporations—spend the windfall.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a Certified Financial Planner™ professional.