Tax Bill Changes and Trickle Down Economics: What We Know Now

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Researched by Industrial Info Resources (Sugar Land, Texas)--After much jockeying and rewriting, the much-anticipated U.S. tax reform bill was signed into law on December 22. While tax cuts were of primary importance to the Trump administration in order to stimulate the economy, much of the reform was aimed at simplifying the overall American tax system.

On a personal income tax level, it is estimated that the number of taxpayers who itemize on their tax returns will drop from nearly one third of Americans to less than 10%. That is an enormous reduction in overhead for the federal tax system. For business taxpayers, simplified accounting (cash method of accounting instead of accrual and elimination of inventory-keeping requirement) will now be allowed for companies with less than $25 million in annual revenues. Previously, this limit was set at $5 million in annual revenues; this will be another substantial decrease in accounting and reporting expenditures for the U.S. tax system.

The big news for corporate taxpayers was the reduction in the corporate tax rate, from 35% to 21%. Many U.S. companies are busy running the scenarios and analyzing where to invest this extra cash flow. While there was speculation whether companies would sit on this cash versus distributing to employees, it now appears that a large number of influential companies will be giving out one-time bonuses and increasing wage rates overall. These include American Airlines Incorporated (NASDAQ: AAL) (Fort Worth, Texas), AT&T Incorporated (NYSE:T) (Dallas, Texas), Bank of America Corporation (NYSE: (BAC) (Charlotte, North Carolina), Comcast (NASDAQ:CMCSA) (Philadelphia, Pennsylvania), Fiat Chrysler (NYSE:FCAU) (London, England), Fifth Third Bank (NASDAQ:FITB) (Cincinnati, Ohio), Jet Blue (NASDAQ: JBLU) (Long Island City, New York), Southwest Airlines (NYSE:LUV) (Dallas, Texas), Walmart (NYSE:WMT) (Bentonville, Arkansas) and Wells Fargo & Company (NYSE:WFC) (San Francisco, California). This marks the realization of the trickle-down economics that analysts have been expecting for many months, as the corporate tax relief and resulting economic energy is putting cash back in consumers' pockets.

The other major provision affecting companies is the reduced tax rate on the repatriation of foreign earnings. It is estimated that there is almost $3 trillion in U.S. company profits stranded overseas, due to what were some of the highest tax rates in the world. What used to be taxed at nearly 40% when brought home will now be able to be returned to the American economy at a rate of 15.5% for liquid assets (cash) and 8% for nonliquid assets. Ongoing foreign earnings will be taxed at a rate of 10.5%. Some critics have asserted that companies will use the majority of this money for stock buybacks, only benefiting investors rather than being reinvested for economic growth. And while buybacks were up to $86 billion in December (the highest level since June), strategists at Bank of America have estimated that only half of these foreign earnings will ultimately be used for stock buyback purposes.

Another item of high importance for corporations is the expansion of the bonus depreciation. This, in effect, allows the early expensing of property placed into service, rather than deducting it over time (some of the applicable property schedules stretch to 20 years). Previously, companies could deduct half of the expense in the first year, but now, 100% of the expense may be written off immediately. This should lead to an increase in capital expenditures, by giving companies favorable (and immediate) tax benefits for investing in company assets.

One change that might hurt in the short-term, but is quite healthy economically, for the long-term, is the new interest expense limitation. The cost of debt used to be fully deductible but will now be limited to 30% of adjusted income (earnings before interest, taxes, depreciation and amortization). The amount that is deductible will be smaller because in 2022 companies will only be able to expense 30% of earnings before interest and taxes but after depreciation and amortization. This is a much-needed check on the rampant debt structures of many companies. While it will certainly encourage less borrowing, it may even incentivize some corporations to deleverage in order to reduce their tax burden.

Similarly, changes made to the deductibility of net operating losses may require some adjusting, but should end up being beneficial for the overall economy. Previously, these losses could be carried back two years and then forward 20 years. Now, losses are only 80% deductible in any given year and can only be carried forward (indefinitely but now with interest). Only farming businesses will be allowed to carry losses back, and only in certain instances.

With the tax bill finally passed and the new year beginning, we can see some effects already that reveal the trickle-down has begun. Only time will tell the end result, as these changes are rolled out and implemented into U.S. business practices in 2018.

For related information, see January 16, 2018, article - U.S. Refiners to Benefit Most From Tax Code Rewrite.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.