why look at the corporate tax rate?
As I’ve mentioned on occasion in other posts, one of the features of today’s US stock market is that it seems to pay no attention at all to the rate at which publicly traded companies pay tax. All that counts is (after-tax) eps and eps growth.
A generation ago, when I entered the market, the opposite was the case. Acting on the assumption that a company couldn’t sustain a super-low tax rate for a long time, analysts scrupulously adjusted, or “normalized,” a company’s tax rate, usually to the statutory maximum. Of course, it has turned out that some firms–and some industries–have been able to maintain a sub-par tax rate for far longer than anyone imagined possible back then.
the US tax system
There are two main issues with the current US corporate tax system, as I see it. The statutory rate of 35% is very high in comparison with the world average of around 20%. So, if there isn’t a crucial reason to locate here, the US is financially a bad place for a company to have operations. Also, politically savvy industries–oil and gas drilling, for example–have been able to lobby for special breaks that make the tax code unduly complex and the amount that the IRS collects less than it should be.
President-elect Trump is promising to address this issue by lowering the federal corporate tax rate to perhaps 15%. Implied, but not yet stated, is that the tax code will also be simplified by wiping out special exemptions for certain industries. There seems to be widespread support for both parts of such reform. So it seems to me that the effort, which has always previously been derailed by special interests, has a good chance to succeed.
This means, though, that for the first time in a long while, analysts will be scrutinizing company financials to try to separate winners from losers.
The obvious winners are firms that have large amounts of US taxable income and that pay cash taxes at the full 35% rate. The pharmaceutical industry is one. No surprise that most of the tax inversions of the recent past have been in pharma.