Some new taxes are hitting businesses in the United States this week courtesy of your friends, the Democrats. Here they are.
Capital Expensing
R+D expensing
Stock Buyback Tax of 1%
Corporate Minimum Tax of 15%
Cap on Interest Expenses
That doesn’t include the scads of regulations that always come out. While official financial publications won’t predict what will happen, I will.
Businesses will invest less and the income inequality that social engineers constantly fail to solve with their ham-handed ideas will increase.
First, corporate finance isn’t understood by a lot of people, especially those in Congress but corporations never pay taxes. They aggregate them. When taxes go up, they find ways to pass along the costs to their customers.
As Milton Friedman said, the most efficient corporate tax rate is 0%. That would allow companies to pay employees more, use capital more efficiently on net present value positive projects, and sell off unproductive assets to someone else that finds them productive.
Assume you are in the C Suite of a major corporation and now are faced with all these new taxes. You have to make decisions on where to allocate capital for your business.
Are you investing in new machines to make your business run more efficiently? Probably not due to the new capital expense rules.
Are you going to engage in R+D to explore future innovations that could make your business more profitable and your customers’ lives happier? Probably not due to the new R+D expense rules.
With the new Corporate Minimum Tax of 15%, you will use every legal and accounting machination within the rules to avoid paying that tax. You’d rather pay teams of consultants, accountants, and lawyers than the government. Recognizing income later or less efficiently will happen. Deciding to recognize income in more tax-friendly jurisdictions will happen. Spending money to set up subsidiary companies and sharing revenue will happen. You will engage in a gigantic game of hide and seek.
With the cap on interest expenses, the amount of borrowing you do will decrease. Companies borrow to build for the future and can write off the interest expense against current earnings. No more. Why borrow for future growth when you will be taxed on it courtesy of the other taxes enacted this year?
Taxing buybacks is stupid and populist. It shows no understanding of corporate finance. The government already triple-taxes corporate dividends. Buybacks shouldn’t be taxed at all. Personally, I’d love to see a 0% dividend tax to incentivize companies to distribute directly to shareholders so they could decide what to do with the money. Cash would flow to a lot of pension funds and they would reinvest it into companies they thought would perform better, or, they’d reinvest the dividend back into the company that paid it making it more cash efficient. The “working man” would be better off.
What else will happen?
Companies will accumulate cash on their balance sheet making them more vulnerable to a merger or an acquisition. Since they can’t spend it or buy back stock, they will let it accumulate until the tax is repealed. Of course, more M+A means more concentration and less competition so pricing power gets concentrated.
With more cash, guess who gets bigger bonuses? The C Suite. Because companies are averse to keeping excess cash on balance sheets, the C and next-tier executives will get it, exacerbating income inequality and giving Democrats a stupid talking point.
Companies might choose to increase benefits like education for employees if they can write it off against earnings. You might see a lot of corporate people lining up for secondary degrees on the company’s dime.
I think you will see more big corporate M+A activity with excess cash replacing internal R+D activity. The incentive will be to buy innovation rather than invent it yourself. That’s great for venture capitalists but maybe not so great for the broader economy since when innovative startup companies are absorbed into big corporates, their innovative spark is extinguished.
Dumb, dumb, and dumber. I think that most Americans want a flat tax of 15%, no write-offs, and to send it in. Make $100k, send in $15k and keep $85k. No accounting costs or legal costs.
Friedman was correct that 0% is the correct corporate tax. I used to attend church with Scott Walker and love the man to death. He is the kind of man that truly would give you the shirt off his back if you needed it. The real deal. It’s hard to argue against a flat tax based on fairness. And my inner libertarian wants to starve the beast, so I say 10% flat tax or lower. However, we humans aren’t really into fairness and rationality thus the envy and resentment genes win out and the bulk of voters will ALWAYS choose a progressive tax schedule. The point of all of this insanity is to crush and subdue the Democrats’ biggest enemy, the American Middle Class (non-government employees).
You miss one point. They have an FTC that's basically against mergers, so acquisitions become a whole lot more difficult