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What a US Tax Reform Could Mean For Stocks?

There have been numerous reports suggesting that a corporate tax reform in the United States is on the cards. The United States has one of the highest corporate tax rates in the world and reducing it could have a positive impact on business and cash flows. It is no wonder that investors and shareholders are excited about the possibility.

What does the corporate tax reform entails and is it likely?

The tax reform proposed looks to permanently reduce the corporate tax rate from 35% to 20% and set a cap of 25% on taxing pass-through income from small businesses. While this is good news for many, it also leads to a cut in Federal revenue. The proposed changes are expected to reduce federal revenue by $1.5 trillion in 10 years, which inevitably has caused opposition among house representatives.

Despite opposition to the tax reform, many analysts believe that it is still likely to go through. For instance, Goldman Sachs analyst reported that they believe the odds of a tax reform by early 2018 is around 80%.

What does this mean for companies?

The United States currently has the highest statutory corporate tax rate in the world at more than 39%. The high US tax rate and complex tax system have set US companies back due to the high costs of tax consultations and the amount that goes into paying for taxes.

By reducing the overall tax on companies, and simplifying the process, companies stand to benefit two-fold.

One, by saving more money on tax consultations and two, by paying less tax overall. This means more money gets funnelled down into the bottom line and into the hands of shareholders, employees and also retained by the company to expand and grow.

Analysts at Morgan Stanley said that they expect a tax rate cut to 25% would provide a 3% boost to overall forecast earnings. Earnings growth this year has already helped the US market reach new all-time highs but a boost by the tax reform next year could be the catalyst to help propel profits and stocks further.

The Foolish bottom line

The proposed tax reform can have a ripple effect that can be hugely beneficial to shareholders. It remains to be seen if the change will eventually go through, but if it does, companies and shareholders alike are set to reap the benefits. Not only will it improve cash flow among companies, but employees can also benefit from stronger company profits, increasing spending and the boost to the economy as a whole.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.