USA—TAX-REFORMS
US companies are expecting sharp increases in earnings next year as Republicans in Congress remove the final obstacles to their overhaul of the US tax system, with a bill likely to be passed into law. Analysts and executives expect corporate earnings to be boosted by an average of about 10 percent, with some companies set to see significantly higher benefits of up to 30 percent, thanks to the proposed reduction in the main rate of US federal corporate tax from 35 percent to 21 percent. Companies with relatively high tax rates and mainly US-based revenues, which are not hit by the new charge on overseas assets, will gain the most from the new code. Oil refiners, railroads, airlines and banks are expected to be among the biggest beneficiaries. Delta Air Lines was one of the first companies to specify the expected boost to its profits, saying the tax cut would raise next year’s earnings per share by about 18-19 percent. One of the biggest gainers is likely to be Warren Buffett’s Berkshire Hathaway, in part because of the conglomerate’s focus on the US economy. The tax cut will boost its earnings next year by about $2.6bn, or 15 percent, according to forecasts by KBW, the investment bank. Most companies have been reluctant to discuss how much they would benefit from the tax cut, arguing that they needed to see the full details before they could assess its effects. The 503-page bill was published late on Friday afternoon, after negotiations between Republicans in the Senate and the House of Representatives; companies and their advisers have been working over the weekend to understand its implications. Details of the legislation could have a significant impact on the effective tax rates that companies face. Also speaking to CNN on Sunday, Mr Mnuchin said the legislation represented a huge tax overhaul that would fix a “broken” system and deliver large tax cuts to working families. Countering claims that the tax bill hands the rich an unprecedented windfall, he said families making $150,000 a year would benefit from a $4,000 tax cut and families on $75,000 a year would gain $2,000. Donald Trump on Sunday tweeted “we are just days away” from finalising the tax bill. The US president described the reforms over the weekend as “one of the greatest Christmas gifts to the middle-class people” as he tries to rush it through Congress to make the most of the dwindling Republican advantage in the Senate. Analysts and executives have been making estimates of the bill’s impact on earnings, helping drive the S&P 500 18 percent higher this year. Jonathan Golub, chief US equity strategist at Credit Suisse, said he expected the corporate tax cut to boost the average earnings of companies in the index by about 8-10 percent, helping to reassure investors that stock market valuations did not look as stretched as they had seemed. Recommended Lawrence Summers: Tax-cut legislation will be bad for public health Tax ‘reform’ and America’s transfer union Free Lunch: Can the US economy take Trump’s tax cut? There are expected to be wide variations around that average, however. Ed Bastian, Delta’s chief executive, told investors in a presentation last week that the tax plan would boost the airline’s 2018 earnings per share by about $1, from a current forecast of $5.35-$5.70. He added that the company would probably use the $800m saving to pay into its pension fund. Other significant beneficiaries are likely to include oil refiners. The leading companies such as Valero Energy and Andeavor can expect earnings per share next year to be 15-32 percent higher as a result of the tax cut, according to Guy Baber, an analyst at Simmons & Co. For equipment manufacturers including United Technologies, Honeywell and Emerson Electric, the average boost to earnings would have been about 10 percent if the main corporate tax rate had been cut to 20 percent, according to Vertical Research Partners. That gain is likely to be only slightly smaller with a 21 percent rate. Banks are also expected to be significant winners. KBW calculated that earnings per share in 2018 would be about 20 percent higher for JPMorgan Chase and 21 percent higher for Wells Fargo under a 20 percent tax rate. Some companies with international operations, in particular the large technology groups, will face a higher tax charge next year as a result of a new levy on cash they have been holding outside the US. But those companies could boost earnings per share by repatriating the cash for equity buybacks. Some aspects of the tax bill passed by the Senate earlier in the month that concerned businesses have been dropped in the final version. A corporate alternative minimum tax, which would have reduced the value of tax breaks such as the credit for research and development, has been scrapped. However, a change in the rules for writing off R&D will increase the tax on such spending after 2021.
Here’s how sectors may fare under the legislation as it stands:
Asset Managers
Stocks of U.S.-based asset managers rose to a record last week on optimism about the tax overhaul. Among the top gainers were Federated Investors Inc., Bank of New York Mellon Corp., Franklin Resources Inc., Waddell & Reed Financial Inc. and Eaton Vance Corp.
That’s in part because asset managers typically pay tax rates of 30 percent to 35 percent, according to data compiled by Bloomberg. It’s higher than many other industries because the firms generally qualify for few deductions, Gabelli & Co.’s Macrae Sykes said last week.
Assets managers also benefit from rising equity markets, as higher prices increase the value of the holdings they manage and improve the performance of their funds.
Asset managers with foreign earnings could see particular benefits from the Senate bill, according to Rory Callagy, a senior vice president with Moody’s Investors Service.
As a group, they’d also gain from the bill’s tax cuts for individuals -- as well as changes to the alternative minimum tax and restrictions on the estate tax. Those provisions would give individual investors “more of their income and inherited wealth” to put into mutual funds and exchange-traded funds, “helping managers grow assets and related fees,” Callagy wrote.
Banks
Lenders including JPMorgan Chase & Co. and Citigroup Inc. have rallied on news of the bills’ progress in Congress. “Banks would be one of the clearest beneficiaries of this tax reform bill," Isaac Boltansky, an analyst at Compass Point Research & Trading in Washington, said in an email early Saturday after the Senate amended the bill.
If Republican promises of faster economic growth are realized, banks will benefit with corresponding loan portfolio expansion, Boltansky said. Moreover, as corporations that pay relatively high effective tax rates themselves -- with fewer available deductions -- banks also stand to benefit a great deal from the reduced overall rate.
Banks would pay slightly higher rates than other types of companies under a new tax on certain payments to overseas affiliates. However, they’d benefit from a last minute change to another aspect of the so-called base erosion anti-abuse tax, or BEAT, which stipulated that payments involving derivatives wouldn’t count toward triggering the levy.
Another provision would eliminate the deduction for Federal Deposit Insurance Corp. premiums by banks with consolidated assets above $10 billion.
Pharmaceuticals
Drug and biotechnology companies would be among those benefiting from paying a reduced tax rate on repatriated earnings.
The money isn’t likely to go to workers, though. Senior executives from Pfizer Inc. and Amgen Inc. have said they’ll use a lower tax rate and cash inflow to return money to shareholders through buybacks and dividends. The new tax regime could also set off a mergers-and-acquisitions boom, as flush war chests give large drugmakers the means to snap up assets they’ve had their eyes on.
Hospitals/Insurers
The Senate bill’s repeal of Obamacare’s individual mandate won’t help health insurers and hospitals, which are already working to cope with the Trump administration’s efforts to undermine the law. Ending the individual mandate -- a requirement that all Americans carry health insurance coverage or pay a fine -- is likely to raise the number of uninsured.
For health insurers, that means the only people who will buy coverage are those that need it most -- typically sicker, more costly patients. In response, many have already started to raise the premiums they charge, or to pull back from some of the law’s markets.
Hospitals have less flexibility. Any increase in the uninsured means a decrease in the number of paying customers. Sick people still show up at the emergency room for care, though, and hospitals often have to write off their unpaid bills.
Private Equity
Because of their use of leverage to juice returns, private equity firms are primarily watching proposals to limit the amount of interest expense they can deduct from portfolio companies’ taxable income.
House Republicans’ bill would cap the deduction at 30 percent of a company’s earnings before interest, taxes, depreciation and amortization. The cap in the Senate bill is stingier at 30 percent of earnings before interest and taxes -- a much lower measure than Ebitda. The firms can currently saddle their companies with debt and deduct the full interest cost.
Dealmakers are also watching a potential change in how their personal earnings are taxed. Currently, their cut of profits on private equity investments made using client capital is treated as a long-term capital gain -- and taxed at a lower rate than ordinary income -- if the investment is held for at least a year. Both the House and Senate bills would lengthen the one-year standard applied to such earnings, known as carried interest, to three years.
Real Estate
For commercial real estate developers and owners, the Senate version brings few significant changes. The biggest revision would create a new tax break for many -- a 23 percent deduction on business income, subject to certain restrictions.
The deduction would be available to businesses organized as so-called pass-throughs -- including partnerships, limited liability companies and S corporations. Pass-throughs don’t pay taxes themselves but pass income to their owners, who -- under current law -- pay taxes at their individual income-tax rates.
Many commercial real estate developers and owners have their businesses set up as such. The House would provide a pass-through tax rate via a different mechanism -- the disparity will be one of the key differences that lawmakers will have to work out.
Technology
The technology industry also stands to benefit from the provision allowing cash stockpiled overseas to be returned home at a lower tax rate.
U.S. companies have $3.1 trillion in overseas earnings, according to a Goldman Sachs & Co. estimate. The largest stockpile belongs to Apple Inc. at $252.3 billion -- 94 percent of its total cash. Microsoft Corp., Cisco Systems Inc., Alphabet Inc. and Oracle Corp. round out the top five, data compiled by Bloomberg show.
Dean Garfield, chief executive officer of the Information Technology Industry Council, which represents almost every major tech company, applauded Senate passage of the bill, saying it “moves us closer” to “a more competitive economy.’
Telecoms
Telecommunications companies, which need to regularly upgrade their networks, will be winners if provisions that increase the deductibility of capital investments stay in the final versions of the bill. AT&T Inc. Chief Executive Officer Randall Stephenson said his company will invest $1 billion more in U.S. infrastructure in 2018 if Trump signs off on tax reform.
The reduction in corporate income tax combined with enhanced deductions for capital expenditures over the next five years will allow AT&T to invest more in fiber optic cable to U.S. homes and businesses, he said.
Industrials
Industrial firms are likely to see the overall package as a positive because of what it would mean for overseas earnings that they’ve left stockpiled offshore.
Both the Senate and House bills have provisions that encourage companies to repatriate past international profits at attractive tax rates. They would then be able to invest more in U.S. operations and pursue growth opportunities and acquisitions. Critics point out that when companies have been given incentives to repatriate earnings in the past, they used the bulk of them on returning cash to shareholders.
Fossil Fuels
Lowering the corporate tax rate and changes to cost-recovery provisions will help spur investment and create jobs, according to the American Petroleum Institute, the industry’s main lobbying group.
The Senate plan would also open a portion of Alaska’s Arctic National Wildlife Refuge to oil and natural gas drilling -- a move that lawmakers estimate could yield $1 billion in revenue over the next decade. A final tax plan may also increase sales from the Strategic Petroleum Reserve to help boost short-term revenues.
Environmental groups have questioned the revenue figures and industry interest in drilling in ANWR. Moreover, not every fossil-fuel producer is pleased with the legislation. Robert Murray, CEO of coal company Murray Energy Corp. and a staunch supporter of the president, attacked the bill as a “mockery of tax reform” because it fails to repeal the corporate alternative minimum tax.
“This legislation is much worse than the status quo,” Murray said in a statement Saturday. “Our company will see a significant tax increase resulting primarily from the loss of the business interest expense deduction.”
Renewables
The proposed tax bill threatens a critical but esoteric source of wind and solar finance: tax equity. In tax-equity deals, renewable-energy developers sell portions of their projects’ tax credits to corporations -- often banks and some insurance companies -- that can apply the credits to their own tax bills. That market is expected to total $12 billion this year, according to Bloomberg New Energy Finance.
Most tax-equity investors are multinational companies and the issue now is that the Senate version includes a provision that imposes a minimum tax on these companies’ foreign transactions. If they have to pay a minimum tax, they may no longer have any need for the credits acquired through tax-equity deals.
“It literally will grind our industry to a halt,” said John Marciano, co-head of project finance at Akin Gump Strauss Hauer & Feld LLP. “Developers would be fighting for the few remaining investors.”
Retail
Retailers expect the tax overhaul to boost demand for their goods and services. Most chains rely on middle- and low-income shoppers for the bulk of their sales, and they say aspects of the legislation on the personal side -- like doubling the standard deduction -- will give such individuals more discretionary income.
The advantage would be temporary under the Senate bill; its individual tax cuts would expire in 2026.
After successfully lobbying to kill a House plan for a border-adjusted tax that would apply to imports, retailers have fully supported the overhaul. They tend to pay effective tax rates that are higher than industries with significant overseas operations, such as energy and pharmaceuticals, so almost any reduction in the corporate rate is seen by retailers as a boon.
Agriculture
Agricultural groups have been split about the legislation, with the National Farmers Union, the second-biggest such group in the U.S., opposing the Senate bill. While it includes provisions that farmers support, such as depreciation of equipment, some are worried it will eventually result in cuts to insurance and food programs that support the sector.
Deficit-boosting tax legislation may mean less money for other programs. A Congressional Budget Office report released last month concluded that tax legislation would trigger automatic spending cuts of as much as $136 billion in the current fiscal year.
But a bipartisan group of leading economists have expressed some deep skepticism about many of the central claims the White House and congressional Republicans are making about the potential effects of the legislation. Below are the top seven myths they have put forward—and the evidence that disproves them.
1. The tax bill will pay for itself.
The Tax Cuts and Jobs Act remains a moving target, with congressional Republicans horse-trading different provisions into and out of the bill and work not yet done to reconcile differences between the House and the Senate versions. Still, the basic parameters are clear. On the household side, the bill would lower the rates charged in each tax bracket, expand the child tax credit, eliminate personal exemptions, and expand the standard deduction. On the business side, it would lower the corporate income tax rate dramatically, and create a big deduction or a special rate for “pass-through” businesses that pay individual income tax rates. It would also let businesses bring back foreign profits at a very low rate, and likely move the country to a territorial tax system, wherein companies pay taxes on profits generated in the United States, not worldwide.
Not so, one of the country’s most respected, non-political economic scorekeepers has said. The Joint Committee on Taxation (JCT) this week found that the Senate proposal would increase output by 0.8 percent over ten years. Because that extra output would get taxed like anything else, it would indeed mean additional money going to government coffers—but not nearly enough to cover the losses from the tax cuts. The JCT estimated that the bill would add $1.4 trillion dollars to federal deficits over a decade, ignoring any dynamic effects on the economy. Taking into account improved growth, it would add $1 trillion to federal deficits—more than President Obama’s stimulus bill, passed to save the economy during the Great Recession. A University of Chicago poll of some of the country’s top economists came to the same conclusion. Not a single one of the experts surveyed said that the kind of legislation under consideration would lead to a falling debt-to-GDP ratio.
2. It will supercharge growth.
Still, Republicans have insisted that the legislation would supercharge American growth. “These massive tax cuts will be rocket fuel—Little Rocket Man—rocket fuel for the American economy,” Trump said this week, referencing Kim Jong Un of North Korea. “Remember I used to say, we can hit 4 [percent growth] and we can hit 3? And they were all saying, forget it, forget it. It was 1.2. It was doing terribly. We were flat. We were even. In all fairness, the stock market was going this way. And now, we’re hitting numbers that nobody thought possible.”
Why doesn’t the bill do more for the economy’s growth rate? In part because the government is passing tax cuts when the economy is already doing well—raising the prospect that the Federal Reserve would move to counteract the stimulative effect of all that deficit spending and would raise interest rates to cool the economy off. And in part because giving tax cuts to rich families and corporations is simply not that stimulative of a thing to do, since they do not tend to put the money toward buying new goods and services.
3. Cutting the corporate tax rate will lead businesses to give raises to regular workers.
The Republican legislation would slash the corporate tax rate from 35 percent to 20 percent, along with eliminating a number of deductions for businesses and tinkering with what gets taxed and when. “It is great for companies, because companies are going to bring back jobs. And we’re lowering the rates, very substantially. But right now, we’re bringing the rates down from 35 percent—which is totally noncompetitive. The highest industrialized nation in the world, by far, and we’re bringing it all the way down to 20 percent,” Trump said this week. “But that’s good for everybody in the room, whether you have company or whether you want a job.”
The Center on Budget and Policy Priorities, a respected left-of-center think tank, has said that researchers view the White House’s analysis “with considerable skepticism due to its methodological weaknesses,” and describes its assumptions as “unrealistic.”
4. Corporations will invest more.
One thing is certain: Companies will bring hundreds of billions of dollars home, to take advantage of the tax holiday. But it seems unlikely that most, or even much, of the money would flow to workers and investment, rather than to shareholders. To wit, a Bank of America/Merrill Lynch survey found that companies were eagerly anticipating what they would do with their cash. They were most likely to respond that they would pay down debt and buy up their own shares—neither of which would help workers much. Other executives have indicated that they would use the money for dividends.
Recent history also suggests that companies would do more to improve shareholder returns than to invest in their businesses or expand and enrich their workforces. Back in 2004, Congress let companies repatriate their earnings, much as Congress is planning to do now. “While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment,” a Congressional Research Service report found.
5. The rich are not going to benefit from the bill.
Trump has repeatedly promised that rich families like his do not stand to benefit from the Republican legislation. “We’re also going to eliminate tax breaks and complex loopholes taken advantage of by the wealthy. Who are they? I don’t know,” he said this week. “I think my accountants are going crazy right now. It’s all right. Hey, look, I’m president. I don’t care. I don’t care anymore. I don’t care. Some of my wealthy friends care. Me? I don’t care. This is a higher calling. Do we agree?”
This is false: As a general point, the richer the family, the more they benefit from the legislation, particularly over time. The Tax Policy Center has found that the biggest benefits would go to families in the top 5 percent as of 2019, with the smallest benefits going to those in the lowest income quartile. By 2027, families in the lowest two income quartiles would be receiving, on average, no benefit at all, with the biggest gains accruing to families in the top 0.1 percent of the income distribution. Moreover, the richest-of-the-rich families would exclusively benefit from initiatives like the reduction in or an elimination of the estate tax, which would let individuals like Trump pass millions and millions of dollars more to their heirs.
“This is going to cost me a fortune, this thing—believe me,” Trump said this week. “Believe me, this is not good for me. Me, it’s not—so‚ I have some very wealthy friends, not so happy with me, but that’s okay.”
This is not true. In fact, Trump stands to benefit to the tune of hundreds of millions, if not billions, of dollars, according to tax analysts, though it is hard to know with much specificity, given that he refuses to release his tax returns and House and Senate Republicans keep tinkering with the legislation. The elimination of the alternative minimum tax. The changes to the estate tax. Abbreviated depreciation schedules. Deductions or special rates for pass-through businesses. All these provisions stand to benefit Trump directly. Indeed, tax experts have said that as a real-estate developer he seems uniquely positioned to benefit from tax reform.
6. The plan is designed for the middle class.
“The beating heart of our plan is a tax cut for working families,” Trump said this week. “That’s what it is. We’re going to make sure that you keep more of your hard-earned money. We’re going to make sure, also, that you have a job that you want.”
This is not true. Indeed, families in the middle of the income distribution would on average see no benefit from the plan as of 2027, whereas families at the top would be paying far less in taxes and many families at the bottom would actually be paying more. One reason is that the legislation changes the way that the tax brackets get adjusted year after year to account for the effect of inflation. More families would get pushed into higher tax brackets sooner under the Republican plan, so they would end up paying more in taxes, even though the marginal rates would be lower. In addition, Republicans have gone after a number of provisions in the current code—the state and local tax deduction and the medical expense deduction, for instance—that help many middle-class and upper-middle-class families.
7. It will help small businesses.
“We’ll also cut taxes for the millions of small businesses that file as individuals, and that’s going to come out of the hopper,” Trump said this week. “It’s getting there and it’s going to be better and better. We’re reducing the tax burden on businesses of all sizes and of every, single kind.”
Here, the Republican rhetoric is more a distortion than an outright falsehood. The plan, as it stands in the Senate, allows “pass-through” businesses—accounting for hundreds of thousands of businesses that pay under the individual rather than the corporate code—to deduct 22 percent of their income before paying taxes, up to a certain limit. In the House, it allows those pass-throughs to pay taxes at a special low rate. The pool of pass-through businesses includes any number of cookie shops and bodegas and corner stores, but also law firms, hedge funds, consulting firms, real-estate development companies, investment partnerships, and lobbying businesses. An estimated 70 percent of the benefits for such pass-through firms go to the top 1 percent of income earners—meaning this benefit is more about helping rich families than it is about helping small local businesses.
Moreover, such changes to the way pass-through businesses are taxed complicate the code and create a preferential category for rich individuals to try to work their income into—something contrary to the very spirit of tax reform. The new provisions have “the potential to become the single greatest inducement to tax arbitrage ever enacted by a single Congress,” the tax expert Daniel Shaviro of New York University Law School has written, also saying that they “might end up being the single worst structural change in the history of the U.S. federal income tax.”
Of course, the Trump administration has promised that what it says is true, and that it would produce evidence of how much good its tax plan would do for the American people. Then again, The New York Times reports that a Treasury document purportedly showing that the Trump tax cuts would pay for themselves has not been forthcoming because it does not—and presumably cannot—exist.
Based on various news items in Internet
