Trump's Corporate Tax Repatriation Plan May Have a Fatal Flaw
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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.
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Here's what corporate America wants Trump to focus on
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.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
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