Trump Looks to Cut Corporate Tax Rate to 15 Percent

Townhall.com ^ | 4/25/17 | Leah Barkoukis Leah Barkoukis

[socialism_stinX]

President Trump has his eye on a corporate tax rate of 15 percent, even if that means adding to the national deficit, the Wall Street Journal reported Monday.

Trump reportedly told his aides to draft a proposal that could be presented to the American people this week.

But such a plan would be an extremely tough sell to Republican lawmakers who’ve spent the last decade making debts and deficits a central issue, Politico’s Playbook notes. Plus, it could put future, permanent, tax cuts at risk.

[socialism_stinX]

A major cut in the corporate tax rate is a great idea. Our current corporate tax system is one of the stupidest things in the history of the world. Our 35% corporate tax rate, one of the highest rates in the world, is guaranteed to drive down capital investment inside the US and push investment and jobs overseas to countries with lower corporate tax rates. Our corporate tax rate needs to be cut to either a permanent rate of 20 to 25% or a temporary rate of 15 to 20% for the next ten years. It would be better to enact a permanent tax rate cut, even if the rate is only reduced to 20-25%, because a permanent tax reduction would generate more big capital spending projects that take 10 to 15 years to pay off completely. It can take two years or more to build a new factory and then another two years to train the workforce and bring the factory up to full production rates. If the tax cut only lasts ten years, then that can leave only six years or less for a new factory to benefit from the tax cut. That might not be enough time to make a large investment pay off. So if we can get some democrats to vote for a tax reduction in the senate, then a permanent rate reduction would be a more effective economic stimulus.

Here’s my two minute course in capital budgeting to explain how a tax rate cut increases capital spending. The basic equation for corporate cash flow is: Free cash flow = EBIT x (1- T) + depreciation – capital expenditures – changes in working capital, where EBIT = earnings before interest and taxes, and T = income tax rate. In the typical capital investment project, almost all of the capital expenditures are in the first few years of the project. Usually when you’re working on a financial analysis for a capital investment, you forecast the incremental increase in operating income (EBIT) generated by business expansion or cost reduction without subtracting out depreciation, and then you don’t have to bother adding back depreciation. So the equation becomes simply: incremental free cash flow = increased EBIT x (1- T) – capital expenditures – changes in working capital. Then you discount the incremental cash flows by the company’s hurdle rate, and then add up the discounted free cash flows for all the years of the project. The sum of all the discounted cash flows is called the Net Present Value (NPV) of the project. If the NPV is positive then the project increases the value of the company sufficiently to be worth the investment. Projects with a positive NPV are generally approved and those with a negative NPV are not approved and have to be improved or else cancelled. The point of all this is that the income tax rate (T) is a key factor in the capital budgeting process and you can see that as T decreases, free cash flow and NPV increase and more projects have a positive NPV. This is why a lower corporate tax rate cranks up capital investment and results in much more investment and resulting job creation in many industries through the economic multiplier effect.

Regarding repatriation of cash flow from foreign subsidiaries, I think the best policy is to tax those profits at a total rate (foreign tax rate + US repatriation rate) equal to no more than the US corporate tax rate. So if we enact a corporate tax rate of 20%, then cash generated by a subsidiary in a foreign tax haven that charges a 10% tax rate would be taxed with a 10% repatriation rate, while companies would pay no repatriation tax on cash generated in a foreign country with a 25% tax rate. With this policy, we would create no incentive to move business operations and jobs overseas to save taxes on repatriated earnings, while also keeping the repatriation taxes at reasonable levels. That encourages repatriation of cash to be used for investments in the US and for stock buybacks.

A substantially lower corporate tax rate would probably result in less corporate tax revenue collected by the federal government, but it would also create a lot of jobs and increase tax revenue from personal income taxes and payroll taxes. Higher employment also cuts government spending on welfare, food stamps, medicaid, and other social programs that benefit unemployed workers. So my intuitive feel for this is that a major corporate tax cut would not increase total government deficits at the federal and state levels, and would create jobs for millions of Americans and greatly improve the lives of millions of our people, without increasing government budget deficits. We need to get a major corporate tax cut done this year and get our economy growing again at rates of at least 3% annual GDP growth in the next four years. Personal tax relief is also a great idea, combined with budget cuts in the federal government.

[9YearLurker]

Great, great move on the part of President Trump.

Kudos to sticking to his campaign promises on this one.

[onyx]

I don’t want to hear the word DEFICIT!

LIBTARDS have no idea about tax rates, budgets, cash flow, return on investments.

[blackdog]

The tax code is used to punish your enemies and reward your friends. Nobody in Washington wants to give that power away.

[9YearLurker]

If he gets something close to this passed into law he will turbocharge the economy and assure his reelection.

That is, as long as he gets back to deporting more illegals as promised, too. And appoints another conservative to the SC this summer. Even continuing to kill our healthcare system will take a back seat if he can get the cuts, a true conservative to replace Kennedy on the court, and a real crackdown on the illegals currently in the country. Those three moves will make his presidency and legacy.

[nikos1121]

NOw is a good time to weigh into the market.

[9YearLurker]

That’s what folks have been doing this week. There’s still some risk always of the GOPe seizing defeat from the jaws of victory, of course. But this is a huge, great choice and commitment from the president.

[b4its2late]

Do it now!

[trebb]

Ryan is getting ready to become known as one of Hillary’s and Obama’s biggest assets - he will use his failure to do the right thing on ObamaCare as the excuse for not being able to do this.

[FatherofFive]

Corporations do not pay taxes. Consumers pay those taxes, in higher prices for goods.

[mindburglar]

Exactly. The corporate tax rate should be zero. Capital gains as well. Taxing investments is suicide.

[9YearLurker]

And we also all pay for corporate taxes with reduced economic activity, jobs, wages, etc.

[HiTech RedNeck]

Grow the golden goose

[FatherofFive]

Capital gains as well.

And eliminate the Death Tax!

That kills farms

[CMailBag]

“”But such a plan would be an extremely tough sell to Republican lawmakers who’ve spent the last decade making debts and deficits a central issue, Politico’s Playbook notes. “”

During the last decade the RINOS helped Obama DOUBLE the national debt.

[redgolum]

If corporations are legally treated as individuals, then tax them as such.

[TangoLimaSierra]

In future news...
"Federal judge blocks Trump's tax cut for no particular reason."

[central_va]

Anything Trump wants needs to be first approved by Chuck Schumer as he runs the country now. I mean down to the last penny.

[jimwatx]

So my intuitive feel for this is that a major corporate tax cut would not increase total government deficits

Conservative economists say otherwise, predicting the deficit to increase anywhere fron $2.5 trillion to 12.5 trillion over 10 years should these tax cuts pass. Now if Trump were to talk spending cuts in addition to tax cuts I would be all ears, but he doesn't seem inclined in that direction.

[central_va]

Tax cuts in the 60's and again in the 80's ballooned Federal revenues. So what do you know? Jack squat.