Dow Gains From Caterpillar's Climb, But Will Tax Issues Hurt Stocks?

Caterpillar led the Dow slightly higher Wednesday, even though the company faced scrutiny from Congress over its tax practices. Will taxes bring down the Dow?

Apr 2, 2014 at 11:00AM
Longview

On Wednesday morning, the Dow Jones Industrials (DJINDICES:^DJI) built on their gains from yesterday, adding 28 points as of 11 a.m. EDT. The move followed the release of the latest ADP jobs report which found the private sector added 191,000 jobs during March. The biggest gainer for the morning was Caterpillar (NYSE:CAT), which climbed 1.8% despite having undergone a congressional inquiry into its foreign tax practices. Given that Caterpillar is far from the only Dow component to use offshore strategies to control U.S. taxes, some investors fear that increasing scrutiny will eventually cause the stock market to drop.

What Caterpillar faces
Some members of the Senate's Permanent Subcommittee on Investigations have argued that Caterpillar has used what panel Chairman Carl Levin (D-Nev.) called "dubious tax loopholes" to avoid paying U.S. taxes. For its part, Caterpillar responded to the inquiry transparently, emphasizing that the heavy-equipment maker employs legal means to comply with existing U.S. tax laws and that it pays all the tax that it owes. Other members of the Senate subcommittee took the opportunity to emphasize the flawed nature of U.S. tax law rather than any improper behavior from Caterpillar as the reason for what many see as an unfair ability to escape U.S. taxation on profits allocated to related foreign entities.

With billions at stake, Caterpillar is far from the only company to face criticism for its international tax management. Dow components Microsoft (NASDAQ:MSFT) and Cisco Systems (NASDAQ:CSCO) are just two of many companies with extensive holdings of foreign assets, with Microsoft also having faced an inquiry from Congress.

Tax

Will taxes bring down the Dow?
For investors, the big question is whether eventual changes in tax law will add to tax burdens for Caterpillar, Microsoft, Cisco, and the hundreds of other multinational companies that use tax planning to take advantage of international tax law provisions. If a permanent change in taxes leads to a long-term drop in after-tax earnings, then share prices could take a big hit, which would have a potentially huge impact on stock market levels.

What's more likely, though, is that any adjustment to tax law would be accompanied by lower corporate tax rates, which could offset the long-term impact of tax reform. Politicians in both parties have supported the idea of corporate-tax reform, making it more likely to become law eventually. Depending on how those laws are structured, it's probable that Caterpillar and other companies could end up paying one-time charges for any tax liability. If that happens, shares might take a short-term hit, but most investors are willing to dismiss truly singular negative impacts to corporate profits with only minimal impact on the stock price.

It'll take a long time for lawmakers to work through the issues involved in tax reform and come up with a solution to the issues facing Caterpillar and countless other companies. But even if the government reaches a solution, you shouldn't worry too much about the potential impact on Caterpillar or the stock market as a whole.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers