It is becoming increasingly apparent that there is likely to be a credible effort to enact tax reform during the nest session of Congress.
Most of the preliminary discussions appear to suggest that some reduction in personal and corporate tax rates is on the table. It is important to note that rate and revenue are not synonyms. A reduction in rates, if accompanied by changes in deductions and “loopholes”, could well result in a “revenue neutral” tax law. Alternatively, changes in the tax code could result in an actual increase in the net amount due for some taxpayers.
Individuals and investors should pay heed to the details. For example, a reduction in the 35% corporate tax rate has been widely discussed. This would seem to be a positive for business and, therefore, a potential boost for stock prices. To the extent that there are also reductions in deductions and other changes, smaller businesses may benefit more than larger ones.
At present, large multinationals are often benefiting from tax strategies that are reducing their tax liability to well below the statutory rate of 35%. To the extent that lower rates are offset by reduced opportunities to “manage” tax liabilities, the net effect, for some businesses may be minimal. On the other hand, small companies typically have less ability to manage actual tax liabilities, and could benefit from lower statutory rates.
There is no easy answer for investors. The actual, net impact of any change in the tax code on any single company will have to be considered in the context of each tax payer.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®