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Joe Biden plans to increase corporate income taxes and is likely to succeed. You may not get the rate all the way From 21 to 28 percent forecast, but likely to have some growth.
Who will bear the heaviest tax burden: companies, employees or shareholders?
Higher corporation tax means lower returns per share. Naively, and with all others being equal, this would suggest that the shares should be worth less. The value of a share is the present value of future cash flows. If the discount rate applied to future earnings remains the same and profits fall as a result of taxes, prices should fall. So it is paid for by the shareholders.
However, the U.S. stock market has risen since Biden became a pioneer, winning the election and completing the tax plan (which was clearly explained all the time).
Not everyone else is the same. Perhaps the abuse at the end of the pandemic surpassed the trail of tax news. But the point can be generalized. It has a corporate tax rate uneven wildly, from zero before 1917 to teenagers until World War II, about 50 percent by the middle of the century and then between 30 and 40 percent from the 1980s Trump reduced it to 21 percent in 2017 But in the long run data no changes in steps related to rate changes are shown in terms of earnings, profit growth and valuations. The market doesn’t care.
Economist Paul Krugman believed that it came from the investment of tax firms. That view makes sense. The market sets the overall rate of return that investors expect. That’s the barrier rate that business investments need to overcome. Higher taxes reduce the return on business investment, so less potential investment overcomes the barrier. So there is less investment and less economic growth.
That’s why, like Krugman recently he wrote, the least liked of the corporate tax cut was the part of the 2017 Trump tax cut. Now he thinks he was wrong because it’s a corporate investment has not changed in terms of gross domestic product.
Why not? First, he says, most corporate investment is financed by debt, which is tax-deductible. Then, most corporate investments in software and equipment last only a few years, so the cost of capital is less important (in the same way, the mortgage rate is more important to the individual than what he pays with the car loan). In the end, companies like Apple, Amazon, and Google are almost monopolies with strong market power. Monopoly profits are free money, not investment returns, so they set aside taxes.
Andrew Smithers – City’s venerable economist and former contributor to the Financial Times disagrees. Regarding debt issues and the duration of investments, he cites data from the Office of Economic Analysis and the Fed, which shows that the average life of a fixed asset corporation is 16 years and that net debt is only 30% of the corporation’s capital. employee. In monopolies, the share of production profits has not risen in recent years and is close to historical averages, which is inconsistent with the claims that monopoly power is growing.
But Smithers ’denial is as logical as it is true. Corporate taxation must come from the ability of the private sector to consume or invest. If it is taken out of consumption, it can take three groups: company shareholders, debt holders or employees. We know that shareholder returns on stocks have been consistent over time regardless of the corporate tax rate, so shareholders do not pay. We know that lenders don’t charge less interest when taxes go up, so debt holders don’t pay. Smithers says corporate production wages have been stable over time, returning to average regardless of corporate tax rate. So employees don’t get paid. Private investment is the only thing left to extract taxes.
Smithers believes that after the tax cut, investment has not risen further due to incentive executions for reasons. In the “bonus culture,” executives would prefer to buy shares to increase their earnings per share and the price of their shares, rather than invest in long-term growth.
I’ll let better economists than me call me the winner. But working in an investment fund in my experience makes Smithers ’path very crooked. What we were looking for were companies that were increasing their free cash flow, which is the return on investment and taxes, so that they could return it to shareholders. Companies know that this is what investors want and promise to deliver. If taxes go up, something needs to be reduced to continue to give investors what they want. Long-term investment is a natural place.
robert.armstrong@ft.com
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