3 Reasons Why a Corporate Tax Cut is Good for Companies

Trump’s grand tax plan was released as bullet points on a paper by Treasury Secretary Steven Mnuchin. His idea of making big tax cuts for the corporation is being seen sceptically by many democrats. On the other hand, businesses and republicans cheer for the greatest overhaul of the tax code since 1986. While the polarising new tax cut plan has already started creating controversy, businesses can be benefited.

Pass-through businesses like hedge funds and real estate companies will be hugely benefited by the new 15 percent tax. Some economists argue that this tax cut will create massive deficits in the economy. However, we will be focusing on the 3 reasons why this tax cut will be good for companies.

Tax Cut

50% Tax Cut

 

Businesses paid more than 35 percent effective rate of tax on their earnings. Small businesses like partnership firms, mom and pop shops and real estate companies had to pay big taxes. Some bigger entities like hedge funds also came under the same tax bracket. However, most of these businesses are pass-through. This means that the incidence of their taxation lies on the individual who receives their services. Trump’s new tax plan will not only reduce their burden but also cut it by more than 50 percent. Such a herculean tax cut would bring accounting relied to small businesses. Cash saved by paying smaller taxes can be used for expanding these businesses.

Increased Domestic Investment

 

High taxes leave corporations and individuals with much less money to invest. However, when taxes are reduced significantly, investment is encouraged in the country. This investment could be in the form of stock market risks. Alternatively, it could also mean the production of more fixed assets in the country. Firms in the US are burdened with debt. With lesser taxes, they will have more cash to pay for their debts. Additionally, they can now invest in other methods of innovation. Research & Development could be encouraged in the economy.

Increased Economic Growth

 

With better investments come better outputs. The US has one of the highest effective corporate taxes in the world. Lower taxes would not only prompt domestic corporates to work better but would also help in creation of new businesses. Firms with lower taxes can now easily increase wages of their employees. New employees will be hired. This will reduce the unemployment rates and enhance overall employee satisfaction. Consequently, more income will mean more expenditure and more savings.

Once triggered, this cycle of growth will not only affect corporates but individuals as well. The tax cut may create a deficit but it may also help in increasing the GDP and national income. Therefore, the plan is likely to get bipartisan support.

 

Ben Myers

Ben began his long career in international finance and investing after graduating with a degree in Finance & Accounting. Prior to founding a financial advisory firm he worked with multi-national institutions including HSBC and Bank of Ireland. After several stints as a chief analyst at forex/binary options companies Ben still remains a keen trader and featured contributor on numerous financial sites.