A Potential Boon from Lower Corporate Taxes

Thursday, January 6, 2011

Just when we thought paying the US government deficit was the highest concern, a joint political effort focused on future economic growth is emerging. The approach? To rewrite the corporate tax rules, with the goals of simplification and lowering the tax rates.

Here’s why this action could be a boon – to the US economy and to investors.

The Wall Street Journal today has the story in “Momentum Builds for Corporate-Tax Overhaul” –

“The White House and congressional Republicans are moving from different directions toward a consensus that the U.S. corporate tax code needs a fundamental overhaul, a goal high on corporate leaders’ agenda.

“Specific proposals for retooling the complex corporate-tax system aren’t on the table and the debate over the issue is sure to be lengthy and difficult. But President Barack Obama and Republican congressional leaders are separately sounding the same broad theme that corporate tax rates should be lower.”

Note: Keep in mind that government leaders won’t accomplish this in a vacuum. Corporations, who best understand business needs and tax change consequences will play a key role. (This is where lobbyists actually provide high value.)

Real, powerful benefits

Certainly, corporations and stock investors welcome the possibility of higher after-tax earnings. More important, though, are the potential major benefits.

  1. Reward success. Lower taxes means more resources for management. And those added funds go to the most successful (profitable) US companies.
  2. Increase US competitiveness in global markets. The World Trade Organization and court disallow industry/company-specific government subsidies. However, an overall tax code change is equal treatment for all.
  3. Put focus on business. Tax simplification and reduced tax rates allow management to focus on what they do best: Operating their businesses and competing.
  4. Boost capital resources. Higher earnings-per-share increase stock prices. Thus, companies have a higher valued “currency” to use for acquisitions and money-raising.
  5. Improve US as an economic base. Corporations are always looking for locations that provide the best environment for their operations. Items like country stability, resources, workers and customers are high on the list, as is taxation.

What about the US deficits?

Herbert Hoover’s administration proved the folly of using current taxes to reduce government deficits in a weak economy. The challenge is to get an underperforming economy back to normal, then growing again so that future taxes cover the deficit.

Today, we are seeing improvements across the board, but the US economy is still not back to normal. Even as some unexpectedly better numbers are showing up, there remains widespread debate about the unknowable speed of future growth.

Government is considering taking a bold step

That is what makes this potential corporate tax overhaul so special. There is an realization that the key to US economic health is corporate success both at home and abroad. Government leaders now appear willing to simplify/cut taxes to improve the likelihood and speed of achieving that health.

If successful, the government’s “investment” (lower taxes) now could produce a nice return (higher taxes) later.

So… Regardless of political party affiliation, investors can welcome the government’s tackling the corporate tax code. As the “lengthy and difficult” effort goes forward, stock prices could benefit through anticipation of future benefits.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

January 2011