Who Will Be the Winners of Tax Reform?

The tax reform debate is far from over, with many key differences between the House and Senate versions of the Tax Cuts and Jobs Act. Compromises will certainly be made, but there are a few groups who look like the clear winners.

A full transcript follows the video.

This video was recorded on Nov. 20, 2017.

Michael Douglass: It does seem to me that there are some reasonably clear beneficiaries to this bill. I would say companies with lower corporate tax rates are a pretty clear beneficiary.

Matt Frankel: Sure. It's not just the corporate tax rate, it's the immediate deduction of business expenses, that's another big thing. Repatriation of foreign cash is big for companies like Apple, who have $200 billion overseas.

Douglass: Let's talk about repatriation a little bit, because I think that's something that a lot of people don't necessarily understand.

Frankel: Sure. Right now, when a company earns profits overseas and brings them back, they're taxed at the normal 35% corporate tax rates. This incentivizes companies to leave their money overseas, not bring it back to the United States and reinvest, etc. So, in Apple's case, for example, they have almost $250 billion overseas now. People often wonder why they don't bring it back and acquire another company or pay a bigger dividend, or something to that effect. And the reason is, they would take a massive tax hit if they did that, something about between $70 billion and $80 billion. So, repatriation allows them to bring the money back at a lower rate. Currently, one of the two bills is proposing a 10% rate, the other is proposing 14%. Both of those look a whole lot better than 35%. So, Apple would, for example, stand to save $50 billion from repatriation if this was passed. This could be a big, big difference in terms of how much they can pay to shareholders, and their financial flexibility in general.

Douglass: Right. Of course, from Congress' perspective, what they would hope would happen with repatriation is that the company brings the money back to the United States, then invests in more jobs in the U.S. When you think about tax reform, that's usually one of the primary goals -- to put money back in pockets of job creators. Now, one of the differences you'll see in the parties is who they view as the folks who should get the money so that they can then spend it. But, that's certainly one of the intentions here in both lowering corporate tax rates and in making repatriation a lot cheaper.

Frankel: Definitely. Like I said, with Apple, they can theoretically bring that money back and open a new plant to expand one of their product lines, or acquire one of their competitors and create jobs in that manner. Another way this could be beneficial is to pay a bigger dividend to their shareholders and stimulate the economy that way. All told, there's over $2 trillion overseas. So, this is no small amount of money that would be coming back.

Douglass: Absolutely. One of the other groups that seems poised to benefit in a lot of ways from these tax bills are the wealthy. You look at a potential repeal, or at least reduction, of the estate tax, alternative minimum tax, and of course, charitable contributions being preserved in reform. That's not a clean sweep, of course. There are some things that could be less beneficial to the wealthy. But there are a lot of things for them to like in these bills.

Frankel: Definitely. The estate tax is one that only affects the top 0.2% of households, that's who pays the estate tax. But there's good arguments to be made for the changes to all three of them. It's absolutely a tax cut for the rich, but the estate tax, the argument is, these people paid tax on the money when they earned it in the first place, why should it be taxed a second time when they die? The alternative minimum tax was originally implemented to make sure that people in the upper-upper income brackets paid their fair share, no matter how many deductions they had. But, lately, the way the numbers work out, it's affecting more and more middle-class families. So you can make the argument it's not really doing what it was intended to do. And charitable contributions, in theory, it's not just a benefit for the rich. Anybody who itemizes deductions can take advantage of it. But the vast majority of that tax benefit goes to the wealthiest Americans.

Douglass: Right. And one of the issues with the alternative minimum tax is that, essentially, what it says is, as you pointed out, Matt, if you're making a certain amount, no matter how many deductions you take, you still have to pay some sort of minimum percentage in taxes. The alternative minimum tax was never indexed to inflation, so it never increased except when Congress stepped in and increased it, which is one of the reasons why it keeps affecting households who aren't in the top 1% of the wealthy or anything like that anymore. So that's one of the reasons why a potential repeal might make a lot of sense.