Corporate Taxation: Past, Present and Future

By Natoma Wealth on March 31, 2021

We continue our discussion of taxes with a greater focus on corporations and how taxation may impact financial markets. President Biden is expected to release a tax plan this week, proposing ~$2 trillion of tax increases over the next decade to cover his spending package. Following a year where there have been numerous COVID-19 relief packages, the government will begin to tackle the coming bill. The U.S. government posted a record $2.7 trillion deficit in 2020.¹

Race to the Bottom

For decades, sovereign nations have competed against one another by reducing corporate tax rates to secure domestic production.² Lower the tax rate, companies shift production, new production creates jobs, jobs create wealth for citizens, and the government collects higher income taxes from wages. Everyone wins, right? Well, the formula is not perfect.

In the United States, the top corporate tax rate was reduced from 35% to 21% with the Tax Cuts and Jobs Act of 2017 (TCJA). Following this change, U.S. Multinationals’ share of income booked in tax-haven countries (e.g. Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland) decreased for the first time since 2007; income booked abroad has nearly doubled since 2000, from 33% to 60%.³ While several provisions of the TCJA expire in 2025, the change to the corporate tax rate is permanent.

What Tax Rates Do Companies Pay Today?

Tax rates for U.S. large cap stocks decreased by several percentage points following the passage of the TCJA.⁴ The largest beneficiaries can be found in the biotech/pharma, communication services, and technology industries (utilities also received a greater than average benefit, but typically can pass on costs to customers).

Impact of Higher Corporate Taxes?

Analysts have attempted to size the impact of higher corporate tax rates on the earnings of U.S. companies. Ultimately, the devil will be in the details of what Congress approves. What is proposed on the campaign trail versus what is approved by Congress are often not equivalent.

Below we share two estimates.⁵ Based on Biden’s intention to increase the corporate tax rate to 28% and the GILTI tax rate (a.k.a. minimum taxes paid on foreign income) to 21%, 2022 estimated EPS would decline anywhere from 6-9%. Forward estimates do not appear to have priced in this change just yet.

While tax increases will be a headwind for the market, we believe companies can adjust and minimize the EPS hit. Management teams have many levers to pull (i.e. headcount, production changes, supply agreements, etc.) and there may be new tax credits. In times of change, whether due to COVID-19 disruptions or future tax increases, strong management teams have demonstrated the ability to separate themselves from the pack.

¹ Source: Bloomberg.
² Source: Empirical Research Partners, “Corporate Taxes and Offshore Sheltering: A Riptide?”, July 13, 2020.
³ Source: Ibid.
⁴ Source: Empirical Research Partners, “Corporate Taxes and Offshore Sheltering: A Riptide?”, July 13, 2020.
⁵ Source: Strategas, “Daily Macro Brief”, March 29, 2021.
Source: Empirical Research Partners, “Taxes and the Growth Leadership: Winds of Change?”, October 26, 2020.

Disclosures: Investment Solutions at Hightower Advisors is a team of investment professionals registered with Hightower Securities, LLC, member FINRA/SIPC, & Hightower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through Hightower Securities, LLC and advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources; as such, neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of Hightower Advisors, LLC or any of its affiliates.

Securities offered through Hightower Securities, LLC member FINRA/SIPC. Hightower Advisors, LLC is a SEC registered investment advisor. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of Hightower Advisors, LLC or any of its affiliates.