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Old 03-27-2019, 09:00 AM
 
1,019 posts, read 211,818 times
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Here's a fascinating unexpected consequence of the tax reform. You might need a subscription, or you might find a version posted elsewhere. I'll try to summarize the ideas in the article for people without a subscription, and I'll try to do so without violating any copyright rules. (Any corporate tax professionals here? Please correct me if I misunderstood the article).

https://www.wsj.com/articles/tax-cha...es-11553679000

The corporate side of the tax reform was intended to level the playing field internationally, as foreign based companies previously had tax advantages when competing in the marketplace against US companies. Leveling the playing field with respect to corporate taxes makes sense, of course.

Regardless if it is, say GE Medical (a US company) competing with Siemens (a German company) for international medical equipment orders or Proctor & Gamble (US) competing internationally with Unilever (British-Dutch) in laundry detergent, the old US tax law put the US companies at a significant disadvantage to their non-US competitors. (examples are mine, not in the article)

Quote:
The new law’s centerpiece— cutting the corporate tax rate to 21% from 35%—put the U.S. closer to the middle of the pack internationally, reducing the benefits of shifting income to low-tax countries abroad.
It also reduced the incentive to offshore US operations because of the prior tax scheme.

The new tax law has some, er, interesting features. Call this the law of unintended consequences. Proctor & Gamble is an example in the WSJ article.

Quote:
P&G is part of the Alliance for Competitive Taxation (ACT), a 40-company coalition that advocated international tax changes in 2017 and cheered the tax law’s passage.
ACT members are now figuring out the tax reform didn't quite reform as well as originally hoped.

There's a new US corporate tax called GILTI, which stands for the Global Intangible Low-Taxed Income tax. GILTI was written in to the law to discourage parking corporate profits in tax havens.

Perversely, to lower GILTI, companies such as Proctor & Gamble have an incentive to offshore even more expenses and jobs. GILTI kicks in under certain circumstances - circumstances that companies didn't expect to affect them.

P&G doesn't park profits in tax havens, so it thought GILTI wouldn't apply. But it did. According to the article P&G now expects to pay the US IRS $100 million annually in GILTI whereas its competitor Unilever is exempt from any such analogous tax at home or abroad.

Quote:
"The high-tax [US companies] are still somewhat screwed,” said Patrick Driessen, a former economist at the Joint Committee on Taxation.
It all has to do with allocating US expenses to foreign operations for federal income tax purposes under GILTI.

*******************

The US companies are still usually better off than they were under the old system, but Congress accidentally put in place incentives for US companies to offshore US expenses so as to minimize GILTI.

The tax reform act was a once-in-a-generation opportunity for the US to simplify all of this stuff. It didn't quite work out that way.
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Old 03-27-2019, 11:22 AM
 
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Simplify? No, far from it. I’ve never had to work more and there’s never been more uncertainty.

The GILTI works in tandom with the FDII (foreign derived intangible income). You can’t look at one side. It’s known as the carrot (FDII) and the stick (GILTI). There’s also the new BEAT tax. Base Erosion and anti abuse tax.

The floor for GILTI is 13.125 so I’m not sure how P&G would have gotten its effective tax rate under that without using any low or no tax jurustrictions. Very few are actually labeled “tax havens”, so they’re just playing with words by saying they don’t operate in a tax haven.
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Old 03-27-2019, 11:39 AM
 
Location: Aurora Denveralis
5,741 posts, read 2,025,930 times
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Quote:
Originally Posted by RationalExpectations View Post
The tax reform act was a once-in-a-generation opportunity for the US to simplify all of this stuff. It didn't quite work out that way.
You don't say.

Maybe if the actual intent had been to simplify and "level the playing field," it might have gotten somewhere. But as the R's all but stated their intent was to to throw lots more money at corporate taxpayers while screwing individuals over the long run, it was never going to happen.

Just as with outhouses, what trickles down isn't really something you want.
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Old 03-27-2019, 11:55 AM
 
4,920 posts, read 1,826,178 times
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Quote:
Originally Posted by Quietude View Post
You don't say.

Maybe if the actual intent had been to simplify and "level the playing field," it might have gotten somewhere. But as the R's all but stated their intent was to to throw lots more money at corporate taxpayers while screwing individuals over the long run, it was never going to happen.

Just as with outhouses, what trickles down isn't really something you want.

+1. The corporate tax cut turned out to be a scam. It was sold on the basis that is was going to free up and repatriate capital that was ostensibly going to fund new facilities, equipment, jobs and higher wages. Instead the bulk of the newfound money went to stock buybacks. CEOs and board members often pay themselves largely with stock options. Stock buybacks reduce the float and boost the price, causing the options to increase in value. Pure greed on display.
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Old 03-27-2019, 11:59 AM
 
Location: NJ
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politicians shouldnt be allowed to have a say in legislation.
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Old 03-27-2019, 12:10 PM
 
2,496 posts, read 1,596,666 times
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Quote:
Originally Posted by Elliott_CA View Post
+1. The corporate tax cut turned out to be a scam. It was sold on the basis that is was going to free up and repatriate capital that was ostensibly going to fund new facilities, equipment, jobs and higher wages. Instead the bulk of the newfound money went to stock buybacks. CEOs and board members often pay themselves largely with stock options. Stock buybacks reduce the float and boost the price, causing the options to increase in value. Pure greed on display.
Only by those who don’t understand business.

The repatriation was a deemed repatriation meaning the money didn’t have to actually come home. There may not be a business use domestically. Why anyone would think cutting an expense like tax is a trigger to expand production is beyond me. Tax doesn’t drive the business.

And also, there were other uses beyond stock buybacks. For example, many companies helped boost their underfunded pension obligations. They locked in a one time permanent item by getting the deduction at 35 percent instead of 21. These pensions help hundreds of thousands of retirees I’d expect.



The hilarity that’s going to happen is in 5 years or so when all the sunset provisions start kicking in. Good luck to the future congress with the position they’re going to be left in.
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Old 03-27-2019, 12:28 PM
 
Location: NJ
23,479 posts, read 29,569,628 times
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Quote:
Originally Posted by Thatsright19 View Post
Only by those who don’t understand business.

The repatriation was a deemed repatriation meaning the money didn’t have to actually come home. There may not be a business use domestically. Why anyone would think cutting an expense like tax is a trigger to expand production is beyond me. Tax doesn’t drive the business.

And also, there were other uses beyond stock buybacks. For example, many companies helped boost their underfunded pension obligations. They locked in a one time permanent item by getting the deduction at 35 percent instead of 21. These pensions help hundreds of thousands of retirees I’d expect.



The hilarity that’s going to happen is in 5 years or so when all the sunset provisions start kicking in. Good luck to the future congress with the position they’re going to be left in.
the idea the reducing cost expense doesnt trigger additional business growth spending is on that i kept saying to people and nobody seemed to like it. i cant grow because my taxes are less. if you want me to expand, you need to reduces my expenses/regulation/etc.

laws sunset intentionally for the benefit of politicians. they will be busy but they will be very happy. they can collect their bribery from people who are impacted by the law. thats the only thing government does.
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Old 03-27-2019, 12:49 PM
 
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Not to mention, under the old worldwide taxation rules, the U.S income taxes on foreign earnings were deferred. If a company could prove it did not need the cash domestically, they could assert that the money was permanently reinvested overseas. No one would want to bring the money back because it was too expensive to access it. Note that In this system, the money was earned in a foreign country...and you paid tax in that foreign country...say France. Had you actually stopped deferring the tax and brought it “home” (what is “home” for multinationals operating pretty evenly across the world?), this would be an additional tax the U.S would hit you with (And it was at a relatively high marginal rate).

Companies STILL don’t need that money domestically. In fact, even after the shift to a more territorial system and the transition tax, many companies are still keeping their APB 23 assertions (from a gaap accounting perspective) that this money is permanently reinvested. They can borrow cheaply here. There are also potentially foreign withholding taxes associated with bringing money up the chain through numerous countries to get it back to the U.S.
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Old Today, 09:41 AM
 
1,019 posts, read 211,818 times
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Quote:
Originally Posted by Quietude View Post
But as the R's all but stated their intent was to to throw lots more money at corporate taxpayers while screwing individuals over the long run
Source? Or made up?

Quote:
Originally Posted by Quietude View Post
Just as with outhouses, what trickles down isn't really something you want.
We can always count on you for a snide comment. I guess we know from which of your orifices you pulled your, uh, "data".
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Old Today, 09:49 AM
 
1,019 posts, read 211,818 times
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Quote:
Originally Posted by Elliott_CA View Post
+1. The corporate tax cut turned out to be a scam. It was sold on the basis that is was going to free up and repatriate capital that was ostensibly going to fund new facilities, equipment, jobs and higher wages. Instead the bulk of the newfound money went to stock buybacks. CEOs and board members often pay themselves largely with stock options. Stock buybacks reduce the float and boost the price, causing the options to increase in value. Pure greed on display.
You've been schooled on this before. Perhaps you don't remember.

Stock buybacks are proof of the tax reform's success.

Companies help workers not by being philanthropic (handing out bonuses and rasises) but by investing capital in profitable ideas, new products, and new business models.

A common canard of the progressive proto-Stalinists of the left (US Senators Schumer, Sanders, Harris, and of course Native-American US Senator Warren, and let's not forget freshman congresstwit Occasional-Cortex) is that stock buy-backs benefit primarily the people at the top and come at the expense of “worker training, equipment, research, new hires, or higher salaries.” Other Democrats have echoed the theme, and their media friends, never having studied economics, are cheerfully passing it on.

Economic logic isn’t strong among the Progressive Left, but this effort by the presidential wannabes stands out for its incoherence.

Share buybacks and dividends are great. They get cash out of companies that don’t have worthwhile ideas and into companies that do. An increase in buybacks is a sign the tax law and the economy are working.

Buybacks do not automatically make shareholders wealthier.

Suppose Company A has $100 cash and a factory worth $100. It has issued two shares, each worth $100. The company’s shareholders collectively have $200 in wealth. Imagine the company uses its $100 in cash to buy back one share. Now its shareholders have one share worth $100, and $100 in cash. As a result of the share buy-back, their wealth is still $200. It is a wash. Shareholders are NO wealthier.

That cash, now in the hands of shareholders, is then deployed by investing elsewhere in the economy.

Wouldn’t it be better if the company invested the extra cash? Wasn’t that the point of the tax cut? No. Maybe this company doesn’t have any ideas worth investing in. Not every company should expand at any given moment.

Moreover, by returning cash to shareholders, shareholders can now rebalance their portfolios to remain on the Pareto Efficient Frontier with optimal asset class allocations.

Now suppose Company B has an idea for a profitable new venture that will cost $100 to get going. The most natural move for investors is to invest their $100 in Company B by buying its stock or bonds. With the infusion of cash, Company B can now fund its venture: it hires people, it purchases capital assets, it brings products to market that people wish to buy.

The frequent rise in stock price when companies announce buybacks proves the point. In my example, Company A’s share price stays fixed at $100 when it buys back a share. But suppose before the buyback investors were nervous the company would waste $40 of the $100 cash. Imagine an overpriced merger or excessive executive bonuses. Not every investment is wise!

The $100, stuck inside Company A, would be valued by the market at $60, and the company’s total value would be $160, or $80 a share. If it spent the $100 to buy back one share, the other share would rise from $80 to $100, the value of its good factory. When a company without great ideas repurchases shares, the price of the remaining shares rise. Buying one share back, even overpaying at $100, raises the other share's value from $90 to $100. This stock price rise is no gift to shareholders. It is just the market’s recognition that $100 has been saved from inefficient investment.

Share buybacks are a great way to get money out of firms with no ideas, into firms with good ideas. We want firms to invest, but we don't necessarily want every individual firm to invest. That's the classic fallacy that I think it turning Washington on its head. Best of all we want money going from cash rich old companies to cash starved new companies.

Buybacks do that.

The economic logic of the tax cut is to create good incentives for profit-maximizing management teams. One can argue whether it will work, but echoing progressive proto-Stalinist's illogical claims is not a contribution to that debate.

Clearly, the common complaint that buybacks are just a way for managers to enrich themselves is exactly wrong.

Moreover, the bill actually gives some incentives against buybacks.

Managers and shareholders face a decision: Leave "cash" -- earning interest -- inside the firm, or invested by the firm in other stocks? Or pay it out to shareholders? If you leave cash inside the firm, investors don't pay dividend or capital gains taxes on it right away. But they do pay the corporate tax. So reducing the corporate tax rate to 21% (plus state) from 35%, while leaving individual taxes alone, is actually a pretty big change in incentives toward leaving money inside the company.
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