Nothing about President-elect Donald Trump’s first year in office matters more to Wall Street than corporate tax cuts, according to
David Bianco, the chief US equity strategist at Deutsche Bank.
“There are many proposals floating around for other changes to be made to the tax code along with a tax rate cut,” said Bianco in the bank’s 2017 outlook released Friday.
“We think most of these proposals are ill conceived, extremely difficult to implement, counterproductive to a stimulus effort and ultimately unlikely to be included in the final legislation. Republicans should focus on implementing this tax cut in a significant, speedy and simple manner if they want it to be successful.”
US corporations pay the highest tax rate among developed countries. This has prompted many companies to set up foreign headquarters or subsidiaries that allow them to stash foreign earnings and avoid the rate of about 39%.
Trump promised to cut corporate taxes while he was campaigning — a move that could make US companies more competitive and encourage the repatriation of foreign earnings. The tax cuts are a cornerstone of his massive fiscal stimulus plan, which also proposes up to $1 trillion in infrastructure spending.
“We think the most important economic policy to enact as soon as possible is cutting the corporate tax rate,” Bianco said. “The sooner it’s done the sooner it will stimulate business and investor confidence and signal a true shift in fiscal policy.”
Bianco forecast that the tax cut would bring the US rate to about 25%, in line with the OECD average.
“Assuming that the US adopts a new corporate tax rate of about 25%, with most rest of the code left the same, we expect S&P earnings per share of $130-140 in 2017 and $140-150 in 2018,” Bianco said. According to FactSet, S&P 500 companies are projected to earn $118 per share this year.
One immediate impact of lower taxes could be a repatriation of funds abroad. Bianco expects this to happen slowly, because companies would want to wait and see that repatriation conditions are permanent.
While the repatriated funds could be reinvested in the US economy through capital expenditure, Goldman’s David Kostin said last month that companies will likely spend the most on buying their own stocks, which would boost their reported EPS.
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