trump, tax cut

U.S. companies could be in line for a significant earnings boost if President-elect Donald Trump makes good on his campaign promise of corporate tax cuts, according to Standard & Poor’s Investment Advisory Services (SPIAS).

The current federal corporate income tax rate in the United States is among the highest in the world at 35%, while the effective tax rate was only slightly lower in 2015 at 29%. Trump has pledged to reduce the rate to 15% and his nominee for Treasury Secretary, Steven Mnuchin, said last week that tax reform would be at the top of the new administration’s agenda.

“The prioritization of tax reform, inclusive of corporate tax cuts designed to improve the competitive position of U.S. corporations within the global economy, is potentially a huge plus for the equity markets since it can significantly boost earnings growth as early as 2017 and beyond,” SPIAS said in a note to investors.

S&P 500 index constituent companies are currently expected to earn about $131 per share in 2017, representing earnings growth of 11.8%. That means, SPIAS says, every 1% reduction in the corporate tax rate could add $1.31 to 2017 earnings.

A full 20% tax cut, by that math, could increase S&P 500 earnings to $157 per share.

Other analysts have come up with similar numbers. “It seems premature to build any such tax plan into forecasts but the impact [of a corporate tax cut] could be considerable if enacted,” Citibank’s chief U.S. equity strategist Tobias Levkovich said in a mid-November note.

According to Financial Post, the overall impact of a corporate tax cut on any single company “will depend on what happens to existing corporate deductions, such as depreciation of research and development spending, and other potential offsets to a company’s overall tax bill.”

“It’s almost like personal taxes,” said Jonathan Golub, chief equity strategist for RBC Capital Markets. “It’s not the tax rate that matters, it’s whether you get to deduct your mortgage, or whether you can deduct your charitable contributions or childcare.”

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One response to “Trump Tax Cut Could Add 20% to Corporate Profits”

  1. What is the effective US tax rate that most domestic corporations pay? A 20% increase in corporate profits is a fantasy.

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