What To Think About Corporate Tax Reform?

The unfortunate reality of the recent corporate tax code revamp is that the issue is largely supported by members of both political parties, yet it passed with only the support of one. Regardless, there is no question this reform is a tremendous positive  for American businesses and workers. While much of the media coverage has focused  squarely on  the idea that reducing  the marginal rate from 35% to 21% is simply a bonanza for already profitable companies, there are several reasons  why this legislation is a firm step in the right direction.

First and foremost, the marginal rate reduction of 14%  will undoubtedly encourage business investment  and formation in America. Simply put, anyone considering starting a business that is wholly or partially  unrestricted by physical location is faced with  the challenge of determining where to locate. If tax rates  are sufficiently higher in one country  versus another (enough to offset other potential benefits) most rational investors and business owners will select the lower cost venue.  The rate reduction will also encourage individuals  who might not ordinarily start a business organized as a C Corp  to do so  rather than  operate as a sole proprietorship or even  as an LLC  as the new law includes tax benefits to such entities as well. The same applies to investors, more of whom will be encouraged to invest in businesses  that can now return more money to shareholders.

As for the notion that already profitable companies will simply  retain the tax benefit or distribute the ball to shareholders, such a circumstance is unlikely. This is not to say that certain companies  will not employ such an approach, but companies looking to grow, which is the primary driver of enterprise value, will have the incentive  and means  to invest in existing employees through higher wages, better training, improved benefits, etc. as well as to expand hiring in general.  As for shareholders participating in the benefits of lower corporate taxation though higher dividends or buybacks, this should also be a net benefit  as  there will be additional capital available for other investment as well as discretionary spending.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *