Corporate Tax Reform: What It Could Mean for the American Industrial Economy
A simplified tax policy has the possibility of reaping significant benefits for all U.S.-based businesses. For capital intensive businesses like manufacturers, it is vital to retain as much capital in the business as possible to help fund the cost of facilities and the associated machinery and equipment. When 35 percent of every dollar earned is sent to Washington as the current tax policy requires, it reduces that pool of funds which otherwise could be used to expand and grow. Tax reform will likely eliminate the temptation for companies to look overseas for lower corporate tax rates to advance their business goals.
Historically, higher tax rates discourage work, investment, innovation and savings, all of which play leading roles in advancing the economy. The caveat is that tax cuts often increases deficits and thus the national debt. However, one of the primary goals of the proposed tax code overhaul is to make it revenue neutral, meaning that it would have no impact in terms of increases or reductions on federal tax revenue.
The beneficial impact of the proposed changes should really help small-to-medium-sized businesses as they typically have more constraints on their sources and costs of capital. Also, small-to-medium-sized businesses create the majority of new jobs in the U.S. year in and year out. In fact, according to the Small Business and Entrepreneurship Council: American business is overwhelmingly small business.
In other words, reductions in corporate tax rates will have a heightened impact on smaller companies versus larger ones when it comes to decisions to invest in new capacities. The average manufacturing project in the U.S. is between $5-10 million by a small-to-medium-sized manufacturer. These manufacturers have often struggled to obtain the capital needed to make the investment to grow their businesses especially after the financial collapse in 2008 when banking regulations and credit availability tightened. These circumstances were particularly challenging for manufacturing companies that were growing or that didn’t have a strong balance sheet to present to a bank. Once a new tax code is in place, these types of companies would be able to take an immediate tax deduction to use as equity to justify their investment, thus encouraging further growth. Scott Parker, chief financial officer of Gray, Inc. and president of Gray Development, explains just how significant the impact could be on the business community.
The bottom line is this – it is an immense undertaking to balance out all of the pros and cons of radically changing U.S. tax policy. Whether at the business or individual level, special interest groups are involved, uncertainty exists to unintended consequences that are likely to occur on any one of the more significant changes and the mere task of unwinding thousands of pages of tax rules and regulations is no small feat.
While the timing and details of a new tax policy are still uncertain, even with the recent announcements from Trump’s administration, it is clear that this new plan will significantly change the business landscape for U.S. companies of all sizes. Once a formal plan has been defined, companies will start to react even before the plan is fully implemented. Ultimately, businesses will behave differently as a result of tax reform which will likely create a positive, domino effect on the economy.
For more information on the current and proposed U.S. tax system, visit Area Development.