Tax Reform is a Win-Win-Win!

Personally, I don’t like Donald Trump very much. I never have. His grandiose, pompous, braggadocios, crude personal style, over the last 40 years or so of his very public life, has always been repugnant to my conservative sensibilities. And I still feel this way. Although some of his Twitter strategy has shown some streaks of brilliance, in general, I wish he would be much more controlled and modest in both his spoken words and his twitted tweets. I cringed, for example, when he boasted that his missile button is “bigger” than the North Korean dictator’s. That kind of trash talk is unbecoming of the office of the President of the United States. Donald Trump is not somebody I think I’d enjoy having a beer with. But, when it comes to politics, policy trumps personality. (Please pardon the pun… the essence of the meaning is true and important.) And the current Republican Party has better policies than the current Democratic Party. (I call them the “current” respective parties, because I don’t view the current Republican Party with the same level of esteem as Abraham Lincoln’s or Dwight Eisenhower’s Republican Party, and I don’t hold the current Democratic Party in the same level of regard as John F. Kennedy’s Democratic Party.) Policies are what is important in politics. And the current Republican Party has better policies than the current Democratic Party. That is why the current Republican Party deserves to retain control of the House and Senate in the upcoming midterm elections. At the very top of the Republicans’ significant legislative accomplishments during the past two years is the most recent tax reform. It is the best tax reform during my lifetime and probably the best tax reform in the last hundred years of United States politics. It’s not perfect — far from it. But it’s better than anything we’ve had in recent history, and it’s far and away better than what the Democrats are pushing.

I grew up in the South, with a very conservative background — conservative religiously, politically and culturally. When I moved to Silicon Valley, to blue country, I registered as an independent voter. I was committed to the concept of voting for the best candidate in each election, without regard to their political party. But sadly, the Democrats have made that idealistic notion impossible. The Democratic Party has become intolerably extreme in their policy positions, and it has completely abandoned reason. John F. Kennedy, in one of the greatest political quips of all time, proclaimed, “Ask not what your country can do for you. Ask what you can do for your country.” But Bernie Sanders’ mantra is, “FREE STUFF!” On social and moral issues, the Democratic Party asserts freedom and tolerance with its words, but with its actions and policies, it seeks to implement a totalitarian state in which nobody is even allowed to disagree with them. CEOs are fired and business owners are fined and driven out of business simply for disagreeing with the homosexual agenda of redefining marriage. And simply decrying the killing of defenseless babies in utero is labeled “hate speech” and a “war on women”. Since about half of the 60 million babies killed in abortions in the United States since 1973 were female, what is the real war on women? It looks more like a war on babies — both male and female — to me. Today’s “liberals” are very open minded — until you disagree with them. Then they want to chop your head off. These polices are bad — really bad — and history will bear out this truth. But in this article, I focus on tax policy.

In all the years Barack Obama was in the White House, the United States real (adjusted for inflation) Gross Domestic Product (“GDP”) never even reached 3%, the mark widely considered to be the indicator of a healthy economy — not even once. This poor economic performance is truly alarming when one considers that this period of time should have been one of the greatest economic recoveries of our nation’s history — the years following the global financial crisis of 2007 and Great Recession of 2008. Why did our economy perform so poorly during the Obama Presidency? Precisely because socialism does not work. It does not produce a healthy economy. No matter how many times Bernie Sanders trumpets, “Free Stuff!” — it’s not free. Food is not free. Housing is not free. Education is not free. Somebody’s got to pay for that stuff. And, as Margaret Thatcher reminded us, “eventually you run out of other people’s money.” Government cannot create wealth. Government can only confiscate, spend, redistribute and squander wealth. Only businesses — investors and entrepreneurs and workers — can create wealth. When it comes to promoting a strong economy — which is in the best interest of all of us (remember James Carville’s famous quote: “It’s the economy, stupid.”) — the best thing government can do is restrain itself and not overly burden its citizens and businesses with too heavy of a tax regime.

The “Tax Cut and Jobs Act” of December 2017 (“Tax Reform”), effective for 2018 and going forward, is the best tax reform in our country in at least the last century. I think the Tax Code should be abolished — not merely reformed — and that the national income tax should be replaced with a national sales, or consumption, tax: i.e., the “Fair Tax”. But if we can’t yet get a complete abolition of the Tax Code, the Tax Reform of 2017 is at least the best we’ve had in a long time. It has achieved three noteworthy accomplishments.

(i) Lowers Tax Rates — Especially for Businesses — Tax Reform lowered tax rates for all taxpayers, especially for businesses (not enough — if you’re going to have an income tax, the tax rate should be limited to 10% — but again, it is at least much better than what we had);

(ii) Brings Foreign Sourced Revenues Back to the United States — Tax Reform motivates U.S. companies to source their revenues from the United States rather than in low-tax foreign jurisdictions — that is, invest in the United States; and

(iii) Repatriation of Foreign Accumulated Profits — Tax Reform motivates U.S. companies to repatriate earnings — that is, bring home their accumulated profits that have been housed in foreign countries. This is huge. For all of my 23 years in corporate finance, corporate CEOs have been asking the federal government to lower the tax penalties on repatriation of earnings. Finally, our federal government has responded to their request.

Individual tax rates were lowered a little — not a lot and not enough — but at least a little. (It’s much better than what the Democrats want to do.) But corporate tax rates were lowered dramatically, from a highest statutory corporate tax rate of 39.1% to a flat statutory corporate tax rate of 21%. This is a very significant decrease, and it needed to be. Before this tax reform, the United States had the highest corporate tax rate of any democratic nation in the world. That’s ridiculous. And among non-democratic countries, only Yemen had a higher corporate tax rate than the United States! (Yemen’s is 50%.) Lowering the income tax rate from 39% to 21% was good for business. Businesses responded by raising wages. More than 150 large companies in the United States announced increased wages and/or bonuses immediately in the wake of the Republicans’ Tax Reform. It’s truly impressive. The list of companies responding favorably to the enactment of this Tax Reform include Aflac, Alaska Airlines, American Airlines, AT&T, Baltimore Gas & Electric, Bancorp South Bank, Bank of America, Bank of Colorado, BB&T, Capital One, Central Bank of St. Louis, Comcast, Comerica Bank, Delaware Supermarkets, Fiat Chrysler, First Financial Bancorp, First Hawaiian Bank, Hartford Financial Services Group, INB Bank, JetBlue, Jordan Winery, Old Dominion Freight Line, Pacific Power, PNC Financial Services, Regions Financial Corporation, SunTrust Banks, The Travelers Companies, U.S. Bancorp, Visa, Wal-Mart, Waste Management, and many others. These companies and many others are hiring more people, raising wages, and growing the economy, as a direct result of the decrease in the corporate tax rate. And, while it apparently is non-intuitive to many, the federal government’s total tax revenues have increased over the last year, even when tax rates were lower, because the economy is growing and more people are working and earning money and paying taxes. That is, the tax base has increased. Lowering corporate tax rates is a win-win-win!

In addition to the significantly lower tax rate for corporations, tax reform also provides a 20% deduction for pass through entities — partnerships and S corporations — which should significantly lower the tax burden on many small businesses.

The Republicans’ recent tax reform uses as “stick and carrot” approach to motivate U.S. companies to source their revenue from the United Sates — that is, make business investments in the United States. Previously, large companies like Apple, Google, General Electric and others have been gaming the Tax Code. They have been acting rationally in the face of a convoluted, arbitrary, political Tax Code that actually gave them incentives to move their revenue generation out of the United States. These companies set up subsidiaries in low tax jurisdictions like Ireland, Singapore, the Cayman Islands and elsewhere, in order to generate revenues from those locations, in order to avoid oppressive U.S. tax rates. In some cases, companies simply legally housed intellectual property in foreign subsidiaries in these locations. In other cases, some companies set up large manufacturing and fulfillment facilities in low tax locations outside the United States. Under the new tax law, U.S. companies must include in taxable income their Global Low-Taxed Income (“GILTI”) earned by foreign subsidiaries. This is the “stick”. The federal government now is saying, in effect, “We’re going to start taxing that foreign sourced income.” The tax rate on this GILTI is 10.5%. But the tax reform plan also puts a carrot in place. Companies are able to exclude a portion of their GILTI, up to an amount of 10% of the foreign subsidiary’s tangible assets (property, plant & equipment.) What this Tax Reform plan is doing is motivating corporations to bring their intangible assets back to the U.S.

Additionally, the recent Tax Reform provides a Dividends Received Deduction (“DRD”), which is a 100% tax deduction on corporate repatriation of ongoing profits from foreign jurisdictions. This is what CEOs have been requesting for decades! But wisely, there are some strings attached. To qualify for this 100% deduction (zero tax) for repatriated earnings, corporations must report all foreign subsidiary profits for the period 1987–2017 and pay a one-time “Transition Tax” on these cumulative earnings. This Transition Tax 15.5% on post-1986 foreign cumulative earnings held in the form of cash and 8% on foreign cumulative earnings held in the form of non-liquid assets such as property, plant & equipment.

The Republicans’ tax reform is good legislation. It’s good for business. It’s good for the economy. It’s good for all of us.

And to the reader who can’t quite stomach the idea of praising Donald Trump for this good Tax Reform — don’t worry, you don’t have to. (And I can understand and respect that sentiment.) President Trump didn’t devise this plan (what a shocka). This Tax Reform plan is the brain child of Speaker of the House, Congressman Paul Ryan. He’s been working on it for years. And Mr. Ryan is somebody I’d very much enjoy having a beer with.