Tax Cuts: Smells Like Victory (For Some more than Others)

A massive corporate tax cut is almost across the finish line. On first-order effects the big winners are companies with domestic net income, which will rise on an after-tax basis by 22% with a stroke of Trump’s pen. It’s obvious to us that these tax cuts will “pay for themselves.” Companies with backlogs of unpaid taxes on foreign income will be hurt by the “deemed repatriation” tax. Companies using international tax arbitrage will lose that relative advantage under base-erosion provisions. Over time, after-tax margin windfalls will be competed away, but that increases the size of the economy and preserves higher after-tax dollar earnings. Higher growth prospects will protect bond yields from possible deflationary effects. Not preserving the SALT deduction was an unexpected political bargaining failure, leading to tax hikes for high-earners. Over time, nevertheless, their after tax incomes and wealth will likely still rise.