April 27, 2017
By Matt Townsend
(Bloomberg) — Nothing gets Corporate America going like a tax-cut proposal.
Chief executive officers are keeping their fingers crossed that the skeletal details offered up by President Donald Trump’s administration Wednesday will turn into a concrete proposal to slash the corporate tax rate to 15 percent from the current 35 percent. That would free them up to invest and fuel economic expansion, they said in interviews and conference calls this week.
“If you listen to the framework of tax reform, I find that incredibly encouraging for companies like ours,” Rick Gonzalez, CEO of drugmaker AbbVie Inc., said on an earnings call Thursday. The proposed tax changes “would put us in position that would be far more competitive.”
Skeptics argue that companies would only pass along tax savings to investors, boosting special dividends and buybacks. The one-page list of principles that Trump’s administration released Wednesday cited the elimination of “tax breaks for special interests,” signaling that some companies might have to give up subsidies they currently receive. But for now, the nation’s business chieftains are rooting for the Republican president.
“We can be a cheerleader from the sidelines,” said Stephen Holmes, chief executive officer of hotel operator Wyndham Worldwide Corp., said Wednesday on a call with investors. “Lower taxes means better cash flow, more opportunity to invest.”
The White House is embarking on the arduous task of turning its one-pageoutline into legislation on a matter that has already divided Congress andlarge U.S. companies. Before the White House weighed in, a detailed plan backed by House Speaker Paul Ryan had drawn the ire of retailers and other industries because of a border-adjustment provision that would tax imports but not exports, leading many members of Congress to raise doubts about it.
U.S. Treasury Secretary Steve Mnuchin, who unveiled the White House’s guidelines on Wednesday with National Economic Council Director Gary Cohn, was vague on details. That’s made it difficult for companies to plan. Should they get more aggressive on investments and merger opportunities, certain that tax reform will materialize eventually? Or should Trump’s early legislative stumbles, such as a failed dismantling of the Affordable Care Act, give them pause about how much they can bank on major changes to the tax code?
“We continue to believe that something does get done this year, but the timing and the magnitude of it are anybody’s guess,” Randall Stephenson, CEO of AT&T Inc., said Tuesday in a call with investors. “But achieving competitive corporate tax rates — this is probably the biggest catalyst available for our public policy makers if they want to increase capital investment and job creation.”
For some executives, a simplified tax code would present some tradeoffs. Waste Management Inc. noted that subsidies for fuel and low-income housing could go away, affecting its tax strategy. “But we’ll be happy to give up the fuel tax credit for a term for a rate reduction in corporate tax rates,” CEO James Fish said on a call.
The White House has pitched Trump’s wish list as a way to boost capital spending to create jobs and boost the economy. But one aspect may do more to help shareholders than workers. The administration reiterated its plan Wednesday for a one-time tax reduction for U.S. companies to repatriate cash from their foreign subsidiaries.
Though Mnuchin didn’t specify a rate for overseas funds brought home, the president said on the campaign trail that he wanted a cut to 10 percent from the current corporate income-tax rate of 35 percent. More than $2 trillion in offshore profits is held overseas by U.S. companies.
A rate cut could be a boon for tech companies like Apple Inc. and Microsoft Corp., and industrial behemoths such as General Electric Co. Their investors would do quite well, too, if history is any lesson. In 2004, a similar move led to an overseas influx of cash that was mostly returned to shareholders, not spent on building factories and creating jobs. While discussing repatriation Thursday, Gonzalez of AbbVie cited the company’s commitment to increasing its dividends.
“The vast majority of that cash was spent in the form of share buybacks, which are good for stocks in the short run,” said Gina Martin Adams, chief equity analyst for Bloomberg Intelligence. More than likely, “companies will give it back to shareholders.”
Such a boost to shareholder returns could help prolong the run-up in U.S. stocks since Trump was elected in November. The so-called “Trump bump” has seen the Standard & Poor’s 500 Index surge 12 percent since then.
Repatriation “could be a nice benefit,” said Marshall Front, who oversees $800 million as chief investment officer at Front Barnett Associates in Chicago. On the other hand, investors could overestimate how much companies actually would give back, he said. “The danger is that people could carried away with the impact.”
There’s another tantalizing benefit for companies with large operations overseas. A lower tax rate offers an opportunity to get a competitive edge against foreign competitors that have to pay more to their own governments.
“Doesn’t matter what industry you’re in,” said Boeing Co. Chief Financial Officer Greg Smith on a conference call Wednesday. “If you’re a global company, it’s going to allow you to compete on a global platform. And so we’re supportive of that.”