Corporate Insights The bottom line:
What tax reform means for your company

The bottom line:
What tax reform means for your company

(2nd Quarter 2017)

Themes

  • A tax primer: Understanding the current situation
  • The four reforms and their potential impact

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Introduction

As the old saying goes, there are only two certainties in life: death and taxes. While we can't offer any novel solutions about the former at the moment, we can provide some insights into potential changes to the latter.

Expectations about the likelihood of meaningful tax reform have risen in the wake of the election of Donald Trump to the U.S. presidency in the fall of 2016. Not only have the White House and Congress talked up tax reform, but the stock market has risen materially since the election. Many seasoned market observers detect tax reform optimism in these new stock market highs.

What are the consequences of tax reform to our clients, in terms of both opportunities and challenges? In this, the seventh in our ongoing series of Corporate Insights papers, we examine what corporate tax reform may mean for our clients. Rather than trying to peer into a crystal ball to predict what might come out of Washington, instead we evaluate the sensitivities of various industries to the potential categories of reform and the possible nuances of each.

In order to understand and analyze current tax reform proposals, it helps to look back at the last two significant reforms in the United States: 1986 and 2004. Before the tax reform of 1986, the American tax code was dauntingly complex, totaling over 26,000 pages. Despite significant lobbying against the bill, Congress overwhelmingly passed legislation that lowered the corporate tax rate from 46% to 34% and greatly simplified loopholes and deductions.1 This simplification and reduction in rates did not last very long, however, as Congress reversed tax cuts and continued adding to the complexity of the tax code; some estimate Congress has made nearly 15,000 changes to the law since the Tax Reform Act of 1986 was passed.2

In 2004, the tax code once again became an important legislative topic through the American Jobs Creation Act (AJCA).3 The bill used tax reform as a lever to encourage domestic growth by allowing the repatriation of overseas corporate cash at a discounted income tax rate. Although there were specific restrictions on the use of repatriated cash, a subsequent Senate report found that an estimated 60-92% of the funds was used to return capital to shareholders via buybacks and dividends.4 With the lessons learned from these major reforms on the minds of today's legislators, we again find ourselves at the forefront of a debate about tax reform and its role in spurring economic growth. Recently, two major tax reform proposals have emerged – one from President Trump and one from the House Republicans under the leadership of Wisconsin Rep. Paul Ryan and Texas Rep. Kevin Brady. The proposals at this stage are still light on detail, but contain several common elements, proposing5:

  • To lower the U.S. corporate income tax rate
  • To alter the tax treatment of non-U.S. earnings
  • To address the deductibility of expenses, including interest expense
  1. Adam Radman. "This Day in History: President Ronald Reagan Signs the Tax Reform Act of 1986." Americans for Tax Reforms, 22 Oct. 2013. 
  2. Andrew Chamberlain. "Twenty Years Later: The Tax Reform Act of 1986." Tax Foundation, 23 Oct. 2006. 
  3. "H.R. 4520 — 108th Congress: American Jobs Creation Act of 2004.” www.GovTrack.us.
  4. Carl Levin and Tom Coburn. Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals. United States Senate - Permanent Subcommittee on Investigations. 11 Oct. 2011. 
  5. The current tax reform proposals also include changes to individual income tax rates, the tax rate on capital gains and dividends, and the estate tax, but this discussion will focus primarily on the implications of corporate tax reform.