December 21, 2017 / 8:18 PM / a year ago

Breakingviews - Tax cuts crystallize haves, wants, can’ts, won’ts

NEW YORK/WASHINGTON (Reuters Breakingviews) - The cut in the U.S. headline rate of corporation tax from 35 percent to 21 percent is a windfall. But to whom? Some companies say they will share the wealth with workers and communities. But there’s less to these claims than meets the eye.

U.S. President Donald Trump points to a large "Merry Christmas" card on the stage as he arrives to deliver remarks on tax reform in St. Louis, Missouri, U.S. November 29, 2017. REUTERS/Kevin Lamarque

First, there are the “haves,” who have already received an early Christmas gift from the U.S. government and have good reason to repay the favor. Comcast (CMCSA.O), for example, benefits from the recent decision to kill rules that required broadband services to treat all online content equally. Now it is paying at least $100 million in special bonuses – good as it goes, but less than the $148 million it paid its top five executives in 2016. Boeing (BA.N) announced a $300 million investment in training and charity giving – just as the Commerce Department finalized anti-dumping duties against the aircraft maker’s rival, Bombardier (BBDb.TO).

Then there are the “wants”, who may hope for favorable treatment. Mobile operator AT&T (T.N) says it will pay $200 million in celebratory bonuses and invest $1 billion – even as it tries to defend a $85 billion takeover of Time Warner TWX.N against a Justice Department antitrust lawsuit. AT&T stands to reap synergies with a present value of perhaps $7 billion if its grand merger goes ahead.

Compared to the potential gains from lower taxes, these gestures are trifles. In a very simplified world, cutting the tax rate by 1 percentage point adds almost $2 to the S&P 500’s earnings per share, according to Citigroup estimates. Based on a tax rate falling from 35 percent to 21 percent, that’s $28 of extra earnings per share – or $280 billion in total, according to a Breakingviews analysis. Pop that on the historical price-to-earnings multiple of 15, and the biggest American companies ought to be roughly $3.6 trillion more valuable.

The reality is far more complex. Companies in general pay less tax than the headline rate – around 27 percent, Citi estimates. In any case, those with weak pricing power are likely to find that the benefits of lower taxes get handed on to customers as lower prices, especially in sectors with fierce competition like retail and restaurants. Conversely, earnings of those with strong pricing power will benefit most, such as makers of guns, cigarettes and drugs. Forget the haves and wants – the real challenge is distinguishing the “can’ts” from the “won’ts.”

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- Several U.S. companies announced new investment and compensation plans after Congress approved a bill on Dec. 20 that would cut the headline corporation tax rate from 35 percent to 21 percent.

- AT&T plans to invest $1 billion in the United States in 2018 and pay $1,000 as a bonus to each of its more than 200,000 U.S. employees once the bill becomes law. The mobile operator cited research saying that $1 billion in telecoms capital investment creates 7,000 American jobs.

- Boeing said $300 million of investments would move forward, split equally between corporate giving, workforce training and facilities for the aircraft maker’s employees.

- Wells Fargo will raise its minimum hourly wage to $15, and aims to donate $400 million to community and nonprofit organizations in 2018 – with a target of 2 percent of earnings thereafter. The bank will also earmark $100 million of capital “and other resources” for small-business and community-focused lending.

- Cable company Comcast will award $1,000 bonuses to more than 100,000 non-executive and frontline employees.

- For previous columns by the author, Reuters customers can click on [FOLEY/]



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