GOP TAX PLAN

[Jim in CT]

Originally Posted by spence

The front half of your statement doesn't make any sense.

The back half makes some sense but it's more complicated than you state. In capital budgeting the tax rate is just one variable in the calculation. The net return is a factor of investments, anticipated benefits, taxes on profit (income less expenses) as well as the hurdle rate etc...

Dialing the corporate tax rate down isn't going to impact investments as much because if the projects are justified they would typically need to be justified by a wider margin than the difference in tax rates provide.

Small business could be different.
Posted from my iPhone/Mobile device

"The front half of your statement doesn't make any sense. "

If a business makes a dollar of income, today they owe Uncle Sam 35 cents. Am I going too fast for you?

"In capital budgeting the tax rate is just one variable in the calculation"

Agreed. But the cost associated with that one variable, is set to decrease significantly. So all other things being equal, when doing a cost/benefit analysis, the cost is going to decrease. Which makes investments look more attractive. This cannot fail to occur.

[spence]

Originally Posted by Jim in CT

If a business makes a dollar of income, today they owe Uncle Sam 35 cents. Am I going too fast for you?

Your wit is dizzying.

Agreed. But the cost associated with that one variable, is set to decrease significantly. So all other things being equal, when doing a cost/benefit analysis, the cost is going to decrease. Which makes investments look more attractive. This cannot fail to occur.

In simple terms, if you were to make a 10m capital investment that hoped to net 1.5m in profit, the proposed difference in marginal corporate taxes would be 2.25% of the total investment. That's not usually going to big enough to sway an investment decision given much larger factors. One reason is that the capital investment is risk adjusted using a hurdle rate which could be 19%. What kind of a return would you get if you just invested that 10m into bonds? This is usually subtracted and make the tax savings even less significant.

Note that the 35% rate is misleading. The effective average rate is closer to 20%...buy maintaining deductions that's even going to go way down which is why the deficit will explode.

The bottom line is that investment ideas are either good or bad. A good idea isn't going to be shelved because of a few percentage points...most companies either have the cash or can leverage given the low interest rates.

[Jim in CT]

Originally Posted by spence

Your wit is dizzying.


In simple terms, if you were to make a 10m capital investment that hoped to net 1.5m in profit, the proposed difference in marginal corporate taxes would be 2.25% of the total investment. That's not usually going to big enough to sway an investment decision given much larger factors. One reason is that the capital investment is risk adjusted using a hurdle rate which could be 19%. What kind of a return would you get if you just invested that 10m into bonds? This is usually subtracted and make the tax savings even less significant.

Note that the 35% rate is misleading. The effective average rate is closer to 20%...buy maintaining deductions that's even going to go way down which is why the deficit will explode.

The bottom line is that investment ideas are either good or bad. A good idea isn't going to be shelved because of a few percentage points...most companies either have the cash or can leverage given the low interest rates.

If the true effective rate is 20%, then cutting the published rate to 20 costs us nothing, and thus the liberals can’t say it’s a gimmick to help the rich. Can’t have it both ways, sorry.
Posted from my iPhone/Mobile device