Contributed by: Angela Palacios, CFP®
President Trump has discussed that corporate tax rates need a face lift. It is likely some changes could be on the horizon for U.S. corporations. But do they need this tax break?
A Little Background
Right now, the US has the 2nd highest corporate tax rate in the world. Over the past 20 years, corporate tax rates around the world have come down while ours have stayed the same, resulting in our goods becoming less competitive and production moving out of the country.
Source: Government Accountability Office, Office of Management and Budget, KPMG, Tax Foundation, Bureau of Economic Analysis, American Action Forum, and Morgan Stanley
There are a couple of ideas being floated right now. The House GOP is proposing dropping the corporate tax rate from nearly 40% to 25%, while President Trump is proposing a more drastic cut down to 15%. Either of these changes could be positive for corporations here in the U.S. potentially boosting performance of their stock prices and/or increasing dividends paid to investors.
Do Corporations Actually Pay the Stated Rate?
If you look at the chart below you see the answer is no. The effective rate the median S&P 500 Corporation pays is below 30% (blue line) and has steadily declined over the past 20 years. The tax cut would still be a boost to the bottom line of the average corporation, since many still pay more than the highest proposed rates. A cut could also potentially prevent off-shoring since the current effective tax rate paid by the average corporation now still falls in the ranks of the most expensive countries to do business in, from a corporate tax perspective.
For some companies paying well below the median, a tax cut and simplification (removal of tax deductions) of the tax code could negatively effect the corporations by increasing the amount of taxes they end up paying. This is one example of how we continue to monitor the economy and policies and how changes may affect your portfolios. Please don’t hesitate to reach out with questions! We are happy to help!
Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.
This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Opinions expressed are those of Angela Palacios and are not necessarily those of Raymond James. Opinions expressed are not intended as investment advice or to predict future investment performance. Economic forecasts set forth may not develop as predicted.