According to Standard & Poor’s Investment Advisory Services (SPIAS), U.S. companies could benefit from a significant increase in profits if President-elect Donald Trump keeps his corporate tax cut campaign promise.
The current federal corporate 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 cut the rate to 15% and his candidate for Treasury secretary Steven Mnuchin said last week that tax reform would be high on the new administration’s agenda.
“Prioritizing tax reform, including corporate tax cuts designed to improve the competitive position of U.S. corporations in the global economy, is potentially of a huge benefit to equity markets, as it can significantly boost earnings growth as early as 2017 and beyond, ”SPIAS said in a note to investors.
The companies making up the S&P 500 Index are currently expected to earn around $ 131 per share in 2017, which represents earnings growth of 11.8%. This means, according to SPIAS, that each 1% reduction in the corporate tax rate could add $ 1.31 to 2017 profits.
A total tax cut of 20%, according to this calculation, could increase the S&P 500’s earnings to $ 157 per share.
Other analysts have found similar figures. “It seems premature to include such a tax plan in the forecast, but the impact [of a corporate tax cut] could be substantial if passed, ”Citibank chief US equity strategist Tobias Levkovich said in a mid-November memo.
According to the Financial Post, the overall impact of a corporate tax cut on a single business “will depend on what happens to existing business deductions, such as amortization of research and development expenses. , and other potential offsets from 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 can deduct your mortgage or if you can deduct your charitable contributions or child care expenses.”