How Will Tax Cuts Affect the US Economy and Corporate America?

Bob Doll at Nuveen Investments discusses the likely impact of tax cuts in the US:

Is it even a good idea to enact tax cuts at this point in the economic cycle? After all, growth has picked up, unemployment is at a 17-year low and capacity utilization is high. It’s reasonable to wonder whether tax cuts spur inflation higher rather than boost economic growth. We agree that inflation is likely to move modestly higher next year (more so if tax rates are reduced), but lower tax rates will likely improve productivity and benefit the economy.

Tax cuts are unlikely to have a significant impact on inflation or productivity other than through indirect stimulation of new investment and job creation.

…..If the corporate tax rate is reduced from 35% to 20%, we estimate this would increase S&P 500 earnings-per-share between $12 and $15 annually. Companies could also see an additional boost in the form of earnings repatriation. It’s possible (and even likely) that some companies would use these earnings benefits to lower prices to increase market share, so some gains may be “competed away.” But we think an overall boost in profits and earnings is likely.

That would amount to an annual increase of between 10 and 13 percent in S&P 500 earnings per share (based on a forecast $114.45 EPS for calendar 2017). Companies that invest in building market share would expect a return on that investment by way of increased growth which would still benefit future earnings streams.

Furthermore, if U.S. companies finally bring their overseas earnings home in a tax-effective manner, it’s fair to wonder what they would do with their cash windfalls. Should this happen, we expect increases in balance sheet improvements, more hiring, a rise in capital expenditures, dividend increases, higher levels of share buybacks and an increase in merger and acquisition activity. All of these actions would be a positive for corporate health and equity prices.

I would expect a big increase in stock buybacks as that will boost stock prices and have a direct impact on executive bonuses. Mergers and acquisitions have less certain outcomes and are likely to be secondary, while new investment and job creation will most likely get the short straw.

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