We may not know effects of corporate tax reform for awhile
What effect does the corporate tax rate decrease have on our economy? What will corporations do with the extra profits and cash?
In theory cutting taxes will provide economic stimulation, growth, and inflation. How? The money corporations save from the decrease in tax liability can be used to hire new employees. Companies may choose to raise wages of its current employees. More quality jobs and higher wages would certainly benefit our economy, businesses, and consumers.
Corporations may opt to invest in property, plant, and equipment, also known as capital expenditures. Constructing new buildings and infrastructure would be positive for our economy. Investment in machinery and new technology gives our businesses a competitive advantage.
Experience teaches us that theory does not always translate to reality. Economists and business leaders do not always agree on the effects of legislative change. Hiring new employees, raising current employee wages, and making capital expenditures would be ideal. What if corporations choose to employ the capital in other ways?
Some corporations may use the extra cash to purchase its own stock. Shareholders and the stock market may benefit and investors may become wealthier, but it would not have the same effect as companies investing in tangible assets and people. Also, it is highly unlikely investors will use their gains for other investment purposes. They probably will not spend their cash.
What if companies decide to use the excess capital to pay off debt? Companies could reduce their exposure to debt and leverage. It would reduce risk and could make the companies more financially stable from a balance sheet perspective. Banks and other lenders may see a decrease in profit due to a loss from interest income.
Corporations may use the money to invest in research, development, and technology. Changing and adapting is necessary, but what if the technology automate processes and eliminates the need for human labor?
Sometimes decisions have unforeseen consequences. The economy may see short-term changes, but we will not know the long-term effects for some time. It will be interesting to see how tax policy shapes economic and financial decisions.
Logan D. Howard, CPA, of Uniontown