Corporate Tax Rate Changes Affect Investors
I see that the tax plan passed and this will affect the corporate tax rate (changed to 21% per Fidelity). In theory, this will impact investors.
Considering the reduction, what can investors expect with this change? I haven't lived through many investment cycles, so I'm curious if this is a net positive, negative or neutral for investors.
From the listed article:
Corporate tax rates will be cut to 21% beginning in 2018. That tax cut
is not scheduled to expire.
Pass-through businesses, businesses structured as sole
proprietorships, partnerships, and S-corporations, will be taxed at
individual tax rates, but will be able to deduct 20% of income. To
prevent high-income individuals from taking advantage of this
deduction, it would only be available to couples filing jointly with
incomes below 5,000. For income above that level, the deduction
would be limited to half of the W-2 wages or the individual's portion
of the pass-through entity's income.
The plan would let businesses fully expense new equipment right away,
but the provision would eventually expire.
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This is probably a net positive for investors as it is a net positive for businesses. The lower tax rate and some other provisions will make them more profitable. Specifically, on the income statement the "Taxes" line will be lower, making their "Net Income" higher. Those higher profits can be distributed to share holders through dividends, stock buybacks, or held as retained earnings. Some companies may seek to grow through acquisition or through research and development. All are good news for owners.
However, what does this mean for investors? The S&P500 have rallied over the past few weeks, hitting highs on 18 Dec and 21 Dec but has since backed off. A myriad of other factors come into play when determining stock prices especially in the short term.
On the long term, one must asks is how well does a specific company serve their customers and how well are they managed. A well managed company with an in demand product will be profitable despite a host of reasons including tax rates.
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