President Donald Trump's ambitious policies face hurdles and fierce opposition on many fronts, but he enjoys bipartisan support in at least one area: corporate tax reform.
Wall Street loves tax cuts. Indeed, one of the catalysts for the extended stock market rally since the election has been the prospect of lower taxes in a host of areas.
Trump's plans concerning immigration and healthcare are getting stymied, but the president's team says it will push hard for action on tax reform by August. As you'd expect, proposals so far on the table create a set of winners and losers for investors. Let's take a look at what's in store.
The prospect of a full-blown trade war from Trump's "America First" stance makes corporate America nervous, but here's the good news: Trump plans to offset the pain of trade restrictions by allowing cash hoards repatriated from overseas to get taxed domestically at a lower rate.
That would be a huge shot in the arm for Silicon Valley and Big Pharma blue chips that are parking a lot of cash overseas, prompting them to launch a wave of mergers and acquisitions. This activity would in turn fuel innovation, organic growth and earnings.
Apple (AAPL - Get Report) is sitting on $246 billion in cash, almost all of it stashed overseas to avoid higher tax rates in the U.S. Apple's overseas cash pile is the biggest among U.S.-based companies. Other beneficiaries would be IBM (IBM - Get Report) , Microsoft (MSFT - Get Report) , Intel (INTC - Get Report) , and Pfizer (PFE - Get Report) , all of which are major overseas cash hoarders.
Trump's team also proposes a cut in the current corporate tax rate of 35% down to 15% or 20%. In addition, companies would be allowed to write off 100% of capital investments in the very first year. Under the existing tax code, firms are allowed to gradually expense their capital investments over a period of three years up to 20 years or more.
This change in depreciation allowances would boost the future returns for companies on new plants and equipment, which would encourage more capital investment in the U.S.
What's more, if Trump agrees with provisions of a tax plan now in the House of Representatives, companies would likely see the implementation of what's called a border adjustment tax (BAT).
A BAT would significantly hike taxes on imported goods into the U.S., while bestowing big tax credits to firms that export goods. Which stocks would be winners and losers under a BAT?
The apparel and retail sectors account for the highest volume of net imports, which means the biggest losers under a BAT would include Wal-Mart (WMT - Get Report) , Home Depot (HD - Get Report) , Target (TGT - Get Report) , Gap (GPS - Get Report) , Nike (NKE - Get Report) , Best Buy (BBY - Get Report) , and TJX Companies (TJX - Get Report) .
Beneficiaries of a BAT include transportation companies such as aircraft manufacturing, airlines, and railroads; media and publishing; and agriculture. Noteworthy examples include Boeing (BA - Get Report) , General Electric (GE - Get Report) , Union Pacific (UNP - Get Report) , Caterpillar (CAT - Get Report) , Deere (DE - Get Report) , Dow Chemical (DOW , Merck (MRK - Get Report) , and Pfizer.
Regardless of how these tax changes pan out, we're likely to see a well-financed battle among corporate lobbyists of all stripes.
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