The cut in the US headline rate of corporation tax from 35 per cent to 21 per cent is a windfall. But to whom? Some companies say they will share the wealth with workers and communities. But there’s less to these claims than meets the eye.
First, there are the “haves,” who have already received an early Christmas gift from the US government and have good reason to repay the favour. Comcast , for example, benefits from the recent decision to kill rules that required broadband services to treat all online content equally. Now it is paying at least $100 million in special bonuses — good as it goes, but less than the $148 million it paid its top five executives in 2016. Boeing announced a $300-million investment in training and charity-giving — just as the Commerce Department finalised anti-dumping duties against the aircraft maker’s rival, Bombardier.
Then there are the “wants”, who may hope for favourable treatment. Mobile operator AT&T says it will pay $200 million in celebratory bonuses and invest $1 billion; even as it tries to defend a $85-billion takeover of Time Warner against a Justice Department antitrust lawsuit. AT&T stands to reap synergies with a present value of perhaps $7 billion if its grand merger goes ahead.
Compared to the potential gains from lower taxes, these gestures are trifles. In a very simplified world, cutting the tax rate by 1 percentage point adds almost $2 to the S&P 500’s earnings per share, according to Citigroup estimates. Based on a tax rate falling from 35 per cent to 21 per cent, that’s $28 of extra earnings per share — or $280 billion in total, according to a Breakingviews analysis. Pop that on the historical price-to-earnings multiple of 15, and the biggest American companies ought to be roughly $3.6 trillion more valuable.
The reality is far more complex. Companies, in general, pay less tax than the headline rate — around 27 per cent, Citi estimates. In any case, those with weak pricing power are likely to find that the benefits of lower taxes get handed on to customers as lower prices, especially in sectors with fierce competition like retail and restaurants. Conversely, earnings of those with strong pricing power will benefit most, such as makers of guns, cigarettes and drugs. Forget the haves and wants — the real challenge is distinguishing the “can’ts” from the “won’ts.”