[ad_1]
Joe Biden intends to raise corporate income taxes and will likely succeed. You may not get the rate all the way from the expected 21% to 28%, but there is likely to be some increase.
Who will bear the heaviest tax burden: companies, employees or shareholders?
Higher corporate taxes mean lower earnings per share. Naively, and like the rest, this would suggest that the actions are worth less. The value of a stock is the present value of its future cash flows. If the discount rate applied to future earnings is maintained and profits go down due to taxes, the price should go down. This is how shareholders pay.
Still, the U.S. stock market has only risen since Biden became the first leader, won the election, and finalized its fiscal plan (which was clear in summary).
However, not everything else is the same. Perhaps the exuberance that witnessed the end of the pandemic made up for the drag on tax news. But the point can be generalized. The corporate tax rate has fluctuated wildly, from almost zero before 1917 to teenagers until World War II, to about 50% in the middle of the century, and then to 30% and 40% from the 1980s until Trump reduced to 21% in 2017 But in the long run data on earnings, earnings growth and valuations do not show changes in pace that accompany rate changes. The market doesn’t care.
Economist Paul Krugman used to think that the tax came from corporate investment. This view makes sense. The market sets the overall rate of return that investors expect. This is the barrier rate that corporate investments must overcome. Higher taxes reduce the return on business investment, so less potential investment overcomes the hurdle. Therefore, there is less investment and less economic growth.
That’s why, as recently Krugman he wrote, the corporate tax cut was the part of Trump’s 2017 tax cut that he disliked the least. Now he thinks he was wrong, because corporate investment has not moved in relation to the gross domestic product.
Why not? First, he says, most corporate investment is financed with debt, which is deductible anyway. Then most corporate investments in software and equipment only last a few years, so the cost of capital is less important (just as a mortgage rate is more important to a person than what you pay for a car loan). Finally, companies like Apple, Amazon and Google are almost monopolies with huge market power. The benefits of the monopoly are free money, not a return on investment, so they ignore taxes.
Andrew Smithers – venerable economist of the city and contributor to the Financial Times – disagrees. On the issues of debt and the useful life of investments, notes the data of the Office of Economic Analysis and the Fed, which show that the average life of corporate fixed assets is 16 years and net debt is only 30 % of corporate capital. employee. As for monopolies, the share of production profits has not increased in recent years and is close to historical averages, incompatible with the claims of a growing monopoly power.
But Smithers’ refutation is both logical and factual. Corporation tax must be removed from the capacity of the private sector to consume or invest. If it goes out of consumption, there would be three groups that could be affected: company shareholders, debtors or employees. We know that shareholders ’return on shares has been constant over time regardless of the corporate tax rate, so shareholders do not pay. We know that lenders don’t charge less interest when taxes go up, so debt holders don’t pay. And Smithers argues that wages relative to corporate output have been stable over time, reversing regardless of the corporate tax rate. Thus, employees do not pay. Private investment is the only thing left to get out of taxes.
Smithers believes the reason investment did not increase further after the tax cut is due to executive aid incentives. In a “bonus culture,” executives prefer to buy stocks to increase earnings per share and their share price to invest for long-term growth.
I will let better economists than me win here. But my experience working for a mutual fund makes me very inclined to Smithers. What we were looking for were companies that would increase free cash flow, that is, profit after investment and taxes, which could be returned to shareholders. Companies know this is what investors want and promise to deliver it. If taxes go up, something has to be reduced to give investors what they want. Long-term investing is a natural place to look.
robert.armstrong@ft.com
[ad_2]
Source link
