The GOP's Tax Plan Is Great for Corporate America

The House Republicans' tax reform plan is a pretty good deal according to one analysis, especially for American corporations.
By Emily Stewart ,

The House Republicans' tax reform plan is a pretty good deal for American corporations, at least according to one analysis. Companies like Apple (AAPL) - Get Report , Microsoft (MSFT) - Get Report and Disney (DIS) - Get Report could benefit.

The Tax Foundation, a Washington, D.C.-based policy think tank, recently released its complete analysis of tax plan unveiled by GOP members of the U.S. House of Representatives in June. Its conclusion: while the proposal would reduce federal revenue by $2.4 trillion over a decade on a static basis, on a dynamic basis (as in, assuming lower taxes translate to a faster-growing economy, a politically contentious idea), it would cut revenue by only $191 billion. The foundation also believes it would lead to higher GDP growth and wages as well as more jobs.

The GOP's tax plan, the sixth leg of House Speaker Paul Ryan's "A Better Way" proposals, overhauls the U.S. tax code to convert the current corporate system to a destination-based cash flow taxation scheme. What that means is that businesses -- both American and foreign -- would pay taxes only on their sales in the United States. Anything sold overseas would be exempt from U.S. taxation.

"It converts the corporate tax, whose current tax base is the profits of corporations throughout the world, to just profits on domestic consumption," said Kyle Pomerleau, director of federal projects at the Tax Foundation and author of the analysis.

It also reduces the corporate income tax rate to 20% from 35%.

Such a shift would have immediate impact, said Bob Willens, a New York-based tax analyst and former managing director at Lehman Brothers, "Companies that earn the lion's share of their income in the U.S. whose income is therefore subject to the highest corporate tax rate would certainly benefit from that," he said.

For firms that already pay low effective tax rates because much of their income is earned outside of the U.S., however, it wouldn't make much of a difference. Gilead Sciences (GILD) - Get Report , which according to FactSet data reported by Forbeshas an effective tax rate of 16.4%, wouldn't be phased by a change. The same goes for tech giant Alphabet (GOOGL) - Get Report .

For cash currently stashed abroad, the GOP's tax plan would enact a repatriation tax of 8.75% for cash and cash-equivalent profits and 3.5% for other profits in order to get companies like Apple, Microsoft and Cisco (CSCO) - Get Report to bring their profits back. But after that, any money earned abroad would go untaxed, which according to Willens would essentially bring an end to inversions.

"That would be a sea of change from where we currently are," he said.

Earlier this year, the Treasury Department instated a new set of rules aimed specifically at killing what would have been a $160 billion merger between Pfizer (PFE) - Get Report and Allergan (AGN) - Get Report . One of Pfizer's principal arguments for the deal was that it would have enabled it to access billions of dollars in foreign earnings tax-free. A plan like the one presented by the GOP would have made the issue largely obsolete.

While American companies that have stashed what is estimated to be more than $2 trillion in cash abroad would likely bring their money back under the GOP's plan, Pomerleau warned that the influx of funds wouldn't jumpstart the economy. "The reason it's better for economic growth is that it treats domestic investment better," he said.

In the short-term, the Republican tax plan would likely benefit companies that export more products and services -- he used the example of Disney -- than it would companies that sell stateside or import from abroad. Another group of companies might see a short-term negative impact: those hurt during the financial crisis like Ford (F) - Get Report , General Motors (GM) - Get Report , AIG (AIG) - Get Report and Citigroup (C) - Get Report , said Willens.

Alphabet, Apple, Cisco, Allergan and Citigroup 

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"They all have large deferred tax assets that they have accumulated during the financial crisis, and when tax rates are reduced, deferred tax assets have to be written down to reflect the new low tax rate," he said. "Each one would suffer a reduction in net worth as a result of the write-off."

Pomerleau said that in the long-term, it all balances out (as long as you abide by a supply-side focused set of assumptions). "The real benefit here is that investment will grow and the economy as a whole will be a lot better off," he said.

Meanwhile, for American wallets, the GOP proposal would lower taxes all Americans. But those with the most to gain would be those at the top. On a dynamic basis, the Tax Foundation concludes the top 1% of earners would see their income jump by a full 13%. (Everyone else's would go up by about 8%-to-9%.)

When it comes to personal taxes, "It's basically the standard tax reform fare, where you cut the marginal rates slightly and broaden the base," said Pomerleau.

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