Keeping your balance: A holiday for taxes

Many American companies with international operations have left profits in other countries to avoid U.S. taxation at rates as high as 35%, which ranks as the third highest in the world behind Chad and the United Arab Emirates. Companies have left an estimated $2.5 trillion in other countries in an effort to avoid these rates as current tax law prevents the money from being taxed until it is brought into the U.S. President Donald J. Trump has proposed a tax holiday for these companies which would provide for a reduced tax rate of 10% be applied to the funds brought back into the United States. The impact would be very meaningful; a corporation with $1 billion dollars parked overseas would save $250 million in taxes upon repatriation. Their tax bill would be reduced from $350 million to $100 million.

What would the impact be for Main Street if such a proposal became law? How could this trickle down to the average person?

Corporations could use the cash infusion to return capital to shareholders. There would be pressure from shareholders for companies to share some of the windfall to investors. It would be likely that many companies would increase dividend payments or have some other special payment to shareholders. Many may dismiss this as the president playing to the rich, but any person with a retirement account could see increased returns.

The returned cash could be used to fund acquisitions of other U.S. companies. This would build value for shareholders as it would allow for the purchases of companies to be made without excessive leverage and the risks that leverage brings while allowing economies of scale to be recognized. It would also open the door for corporations seeking to invest and grow U.S. operations which would have a direct positive effect for workers.

It could cause corporations to decrease their leverage. This may be a particularly attractive option for those with exposure to variable rate debt in an environment where interest rates are expected to rise. This will help to remove interest rate risk from their balance sheets and may help support the elevated valuations which many stocks are carrying. Removing or reducing interest costs would also spur investment and growth.

The common theme for 2017 will be change. We aren’t sure what the changes will be at this point, but with tax policy at the center of the president’s campaign and the current climate seeming to support large-scale reform, change has never been more likely. Ultimately, making the American landscape a more attractive business location will be good for business and those employed by those businesses. But can the administration place the burden of paying for the cuts on the shoulders of the middle class? And if not, who will pay for the cuts? Current models show that the subsequent economic expansion would pay for the cuts; however, these ideas have been tried before and the results have been unclear. One thing that is for certain is that tax reform is more likely than ever and those not paying attention can be left behind.

Ryan Snyder, CPA is a senior manager at Mengel, Metzger, Barr & Co. LLP. He can be reached at [email protected].