Two weeks ago, I came across an interesting article on how the 30 companies that make up the Dow 30 Industrial Average had an effective tax rate that, in many cases, is already darn close to the newly passed corporate marginal tax rate of 21%.
I had a meeting on Monday with this hedge fund manager from New York and we discussed this same topic so I thought I would show you a quick peak from an article in MarketWatch with Factset data. It shows the 30 companies and their median effective tax rate over the last 5 quarters (3Q16, 4Q16, 1Q17, 2Q17 and 3Q17). Here they are:
Hard to read, I know, so expand it a bit but here are some observations:
Well, we all know, from watching the US stock market rise to "newer-highs" on a daily basis as the two levels of US Congress passed their legislation...each day, the Dow would rise and rise. Clearly this tells us the market was building in the expectation of a corp tax cut. But when about half of the Dow 30 already pay an effective tax rate of the new marginal tax rate of 21% of lower, what's the big deal?
To be honest, these effective tax rates include state and local taxes paid as well as federal taxes and taxes in other jurisdictions outside the USA. The idea that these large multi-nationals have kept significant funds overseas due to lower marginal tax rates in those other jurisdictions vs the USA, tells us that they will likely repatriate some of those funds back to the USA over time. The repatriation of this capital from overseas could, over time, lead to capital expenditures in the USA that will drive cash flow, which will be taxed at a lower rate of 21% vs 35%.
The power of fiscal stimulus.