Monday 03, July 2017 by William Mullally

Corporate tax reform could affect your US equities strategy

Side-stepping the fact that Trump doesn’t seem to grasp that tax questions are baked in to things like healthcare, he has pointed it out again—the great Trump tax plan is soon upon us.

Since Trump came into office, murmurs of ‘tax reform’ have been continually uttered, without the ball really moving forward. In one report this week, Trump, when allegedly presented with the idea from a Republican that the new health care law was basically a tax cut for the rich, reportedly shot back that he has yet to get to tax reform, and that will come next.

Side-stepping the fact that Trump doesn’t seem to grasp that tax questions are baked in to things like healthcare, he has pointed it out again—the great Trump tax plan is soon upon us.

So what of corporate tax reform? And how could those changes affect how investors should approach the US equity market? Well before that, let’s look at how corporate taxes work now.

Dr. Marie Owens Thomsen, Chief Economist at Indosuez Wealth Management, told me her thoughts recently. “First of all, yes, a 35 per cent top rate is high, and is among the highest in the world, plus the state and local coroporate taxes, which brings the top rate to 39 per cent, which is high. But that is not the rate that companies pay on average. The average is really 27 per cent. When people stand up and say that US companies pay the highest taxes in the world, it’s simply not true.”

But averages don’t mean that every firm is paying less. According to Dr. Thomsen, it’s really the larger international firms who benefit from the way the system is currently set up. We can almost argue that the difference between the top -rate and the effective rate is a direct measure of how ineffective the tax system is. Companies play so much less because there are so many exemptions, which are also not given across the board. The companies that pay the least are the large international companies and the more domestically-oriented firms pay very high taxes indeed. A General Electric pays almost nothing, whereas a company like Target actually pays closer to the top rate.”

So if there is to be a change, and companies are taxes more equally across the board, investors should look at how that will hit the international firms. “From an investment strategy point of view, we should not invest in the large international firms, as they could end up paying higher taxes, and we should favor the more domestically-oriented firms, in terms of macro-economic fundamentals.”

Of course, who knows what Trump will do at this point. Let’s check back in on this once Trump actually gets around to unveiling his plan, shall we?