In a little more than three weeks, career businessman Donald Trump will ascend to the highest office in the U.S. and become the 45th president of the United States. Needless to say, he has a tough and busy road ahead of him.
Trump plans to tackle tax reform
Among the actions Trump would like to check off his laundry list of goals is tax reform at the individual and corporate level. During his campaign, Trump vowed to lower U.S. corporate tax rates to 15% from 35%. Aside from the United Arab Emirates and Puerto Rico, the U.S. has the third-highest marginal corporate tax rate in the world, and Trump's belief is that lowering the corporate tax rate will encourage investment in the U.S. from foreign businesses and give U.S. companies more capital to reinvest in their businesses and hire more workers.
One final overhaul of the corporate tax structure involves creating a tax holiday to allow U.S. multinationals to repatriate profits that are currently being held in foreign markets. At last check, U.S. companies were holding nearly $2.5 trillion overseas. The idea is that if Trump offers a 10% flat repatriation rate on overseas cash, then U.S. multinationals may jump at the chance to bring that money back into the U.S. and potentially use that cash to create more jobs, boosting U.S. GDP.
Unfortunately, there could be a fatal flaw built into Trump's corporate tax repatriation plan.
The potentially fatal flaw in Trump's corporate tax repatriation plan
In a recently released CNBC Global CFO Council survey, which questioned 39 global CFOs who are helping to run companies with a combined market capitalization of more than $4 trillion, a majority of CFOs expect a tax-free repatriation holiday to occur in 2017 under the Trump administration. However, only 12.5% of U.S. CFOs surveyed suggested that the repatriated capital would be used to increase headcount. In other words, Trump's corporate repatriation holiday could accomplish the goal of bringing money back into the U.S., but Trump could not dictate how businesses will spend that capital once it's back (nor do CFOs want him to).
In particular, CNBC asked CFOs whether or not they agreed or disagreed with the statement, "Companies should not be allowed to use repatriated cash for stock buybacks." A whopping 75% of CFOs disagreed. CNBC notes that the last time there was a corporate repatriation tax holiday on overseas profits in 2004, a clause existed disallowing those businesses from buying back their own stock. Yet based on a congressional analysis from 2011, the repatriation led to minimal domestic investment and hiring, and companies were able to find loopholes to eventually funnel repatriated capital into stock buybacks. This could signal that Trump's focus on getting U.S. multinationals to bring their overseas profits back may not have the effect he had envisioned.
As a whole, just 36% of the CFOs surveyed had an idea of how their company would spend any repatriated cash. Among those who responded, the most common answer was mergers and acquisitions, followed by new buildings/equipment and research and development. If M&A winds up being the primary use of repatriated cash, it could wind up resulting in job losses, given that M&A often leads to cost synergies through the elimination of redundant jobs.
Here's what corporate America wants Trump to focus on
If Trump wants to have a real impact on corporate America, the CNBC Global CFO Council survey would suggest that he focus on reforming the corporate tax rate first and save the repatriation of overseas profits for another time.
According to the survey, not one CFO said that lowering the corporate tax rate to 15% would hurt their business, while 95% said it would help. Comparatively, just 49% of big business CFOs believe repatriating overseas cash would help their business. Repealing the Affordable Care Act nearly had the same positive impact rating among CFOs as creating a tax holiday for overseas cash.
The big question, of course, is what sort of impact corporate tax reform would have on America, its investors, and the workforce. To that end, no one is exactly sure. The Tax Foundation comprehensively examined Trump's tax plan in September (after he released his revised plan) and found that while the plan itself could lead to an estimated $3.9 trillion decline in federal revenue between 2016 and 2025, it would also boost GDP by 8.2%. Of that 8.2%, half -- I repeat, half -- is expected to come from lowering the corporate tax rate to 15%. By that token, my assumption is that we'd probably see higher corporate profits, higher margins, and potentially more M&A activity. However, it's unclear what this would mean for the jobs outlook, because M&A, as noted before, can work against job creation, even if it works wonders for profit margins.
Chances are that as Trump inches closer to taking office, we'll see the president-elect and business leaders engage in more frequent discussions about what's needed to drive both business growth and jobs growth. Whether this leads to a middle-ground deal that satisfies both U.S. businesses and the Trump administration remains to be seen.