By WSJ Staff
President Donald Trump on Wednesday is planning to unveil a
proposal to cut corporate taxes and reduce the top tax rate on
so-called pass-through businesses, including many owner-operated
companies, to 15% from 39.6%, White House officials familiar with
the planning have said.
Here's what the change would mean for Wall Street:
S&P 500 EARNINGS
Donald Trump's tax proposal is expected to cut the corporate
rate to 15%, potentially providing a big lift to corporate earnings
for publicly traded companies.
Every one-percent reduction in the effective tax rate -- what
companies actually pay -- could increase expected earnings for
companies in the S&P 500 by $1.34 a share, according to
calculations Tuesday by S&P Global Market Intelligence.
That might breathe new life into a long stock-market rally. Many
investors have become worried that stocks are starting to look
expensive and tax cuts "would alleviate much of the concern about
valuations," said Bruce Bittles, chief investment strategist at
Robert W. Baird.
Aaron Kuriloff
SMALL-CAP STOCKS
Many investors expect a corporate tax cut to boost small stocks
more than shares of larger companies.
Their reasoning: Multinational companies are able to defer U.S.
taxes on profits earned overseas, but many smaller companies make
most of their profits on domestic sales.
Investors were counting on a Trump tax cut when they pushed up
the share prices of small stocks after the election. The Russell
2000 rose 16% in the month after Nov. 8, compared with the S&P
500's 5% gain. When prospects for the tax cut seemed to dim earlier
in the year, the small-stock rally petered out.
In recent days, with reports that the Trump administration is
pushing ahead again with plans to cut corporate taxes, investors
have been piling into small stocks again.
Corrie Driebusch
DOLLAR
Dollar bulls are cautiously optimistic about the Trump tax plan.
Even though an early outline released Wednesday lacked elements
that were expected to boost the dollar directly, some still believe
that if the plan passes in current form it would be broadly
positive for the dollar.
Some Republicans lawmakers have advocated a plan that would
encourage U.S. companies to repatriate their overseas earnings, a
provision that wasn't mentioned in an early outline of the plan.
That could have given the dollar a boost because companies would
need to exchange foreign currencies for the dollar.
Investors betting on the dollar's rise were also disappointed
that a border-tax adjustment plan, which would tax imports but not
exports, was left out of the tax package. The proposal was expected
to bolster the dollar by raising demand for U.S. products
overseas.
Yet a big corporate tax cut could still boost the dollar by
heating up the nation's economy, investors said. Stronger growth
could lead the Federal Reserve to raise rates at a faster pace,
making the dollar more attractive to yield-seeking investors.
Ira Iosebashvili
BANKS
Banks could get a double benefit from a tax cut. It will fatten
their own bottom lines, but also those of their customers. If
customers then invest more and spur economic growth, that could
fuel more lending, further bolstering banks' profits.
One fly in the tax-cut ointment, at least for some big banks:
Citigroup Inc. and Bank of America Corp. are sitting on huge piles
of deferred tax assets -- $46.7 billion and $19.2 billion,
respectively, of credits and deductions that can be used to reduce
future tax bills. The banks would likely have to write down a
portion of these assets if tax rates are cut, resulting in billions
of dollars in charges that reduce profits.
That would be a one-time event, though, while the gain to
profits would be permanent. There will be a "permanent rise in net
income," said Sanford C. Bernstein analyst John McDonald, and that
is what investors will really care about.
Michael Rapoport
FOREIGN EARNINGS
The White House's plan for a so-called territorial tax system
could be a boon to companies with large international
operations.
U.S. companies would pay little or no tax on future foreign
earnings under the proposed territorial system. The current rules
tax all corporate profits regardless of where they are earned.
About a fifth of the companies in the Russell 1000 index receive
more than half of their revenue internationally, and more than half
receive some revenue from abroad, according to Bespoke Investment
Group data.
Together with other tax reforms, a territorial system could
boost earnings for multinational companies. Bank of America Merrill
Lynch estimated earlier in the year that if the U.S. moved to a
territorial tax system of no longer taxing foreign profits and the
statutory tax rate were lowered to 20% from 35%, S&P 500
companies would see their per-share earnings grow 12% in 2018, all
else equal.
"I like that total territorial at zero. I mean that's kind of
really good," said Frank A. D'Amelio, chief financial officer at
Pfizer Inc., in a January earnings call where he discussed a plan
from House Republicans that would stop taxing future foreign
profits.
Another benefit for companies from reducing or doing way with
taxes on future foreign earnings is that if would eliminate
barriers for firms to bring foreign cash back to the U.S.
Ben Eisen
ACCOUNTING FIRMS & HEDGE FUNDS
Lowering the rate on pass-through income could enhance the
appeal of these businesses. But it may also change taxpayers'
behavior, experts said, especially if the top rate on personal
income is 37%.
"A large risk is that business owners will transform their wages
or compensation income to avoid income, Medicare and even Social
Security taxes," says Michael Graetz, a former Treasury official
under George H.W. Bush who now teaches at Columbia University's law
school.
Laura Saunders
BERKSHIRE HATHAWAY
One major company that would benefit from a lower corporate tax
is Warren Buffett's Berkshire Hathaway Inc., which generates most
of its revenue within the U.S.
A 15% corporate tax rate would increase Berkshire's book value
by 13%, or about $36 billion, Barclays estimated in February based
on the company's 2016 results. A 20% corporate tax rate would
increase Berkshire's book value by 10%, or $27 billion, the bank's
analysts said.
However, a change to the repatriation of foreign profits would
have little effect on Berkshire, Chairman Warren Buffett wrote in a
letter to shareholders released earlier this year. Berkshire holds
about $86 billion in cash, and 95% of it is in the U.S., he
wrote.
When the corporate tax rate was lowered in 1986, Mr. Buffett
wrote to shareholders that the drop was likely to benefit Berkshire
but not its customers, because Berkshire's businesses had strong
brands and wouldn't have to cut prices.
"While this may be impolitic to state, it is impossible to
deny," Mr. Buffett wrote. He also predicted that the 1986 tax cuts
would "very likely bestow a fiscal problem on Washington" and would
lead to higher taxes, higher inflation or both.
Nicole Friedman
(END) Dow Jones Newswires
April 26, 2017 12:59 ET (16:59 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.