Mar 8, 2017

A corporate tax cut might not be as good as investors think

The most prized promise to investors by the Trump Administration is corporate tax cuts, as lowering taxes will directly increase corporate profits and corporate valuations. But the Wall Street Journal warns that the benefits may not be as significant as investors think.

The Journal cites Goldman Sach's calculations showing the GOP plan would cut the effective corporate tax rate from 28% to 24%, good enough to boost after-tax profits by 10%. This would help justify the huge run up in stocks of late.

Not so fast: But investors may not be considering the change in strategy that the cut could instigate. If taxes are lower, so is the cost of capital, making the marginal corporate investment more valuable. If companies invest revenues, profits may even fall. Furthermore, it may encourage companies to reduce their reliance on reputationally damaging tax havens, a move that could also reduce earnings in the end..

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