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The tax code and the global stock market

February 1, 2018 | Commentary

  • Late in December the President signed new legislation that affected many parts of the personal and corporate tax codes. By far the most significant change was a radical restructuring of corporate taxes that brought the United States into conformity on territorial taxation while slashing the top corporate tax rate.
  • For many years the United States pursued a policy of trying to tax U.S. corporations on their world-wide earnings in contrast to virtually every other country that taxed only the income generated in their jurisdiction. The U.S. approach mainly encouraged the establishment of foreign based entities and the sheltering of global income, usually in lower-tax countries.
  • As more investment and earnings by U.S. corporations occurred offshore and beyond the reach of the IRS, foreign-sited cash hoards grew, discouraging easy reinvestment at home. While this backdrop was in place, many other developed countries systematically lowered their corporate tax rates, putting additional competitive pressures on U.S. companies wanting to invest at home.
  • There is no way to precisely estimate how much the out-of-sync U.S. corporate tax code cost the country in terms of investment, growth or job creation, but directionally the effects seem clear. The new tax code not only brings the U.S. into conformity in terms of what income is subject to tax, the 21% marginal tax rate is now near the lowest among developed and major developing countries.
  • The U.S. marched to the beat of its own drum for many years, effectively advantaging other nations around the world. Now it has set the cadence for the entire parade. It is likely that more corporate tax rates will come down around the globe in an attempt to offset any new U.S. advantage. If that happens it will translate widely to more growth and earnings.

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