Now Corporate Tax Rates Become a Wild Card for Stocks in 2015

With Republicans having won control of both houses of Congress, the reduction of corporate tax rates suddenly has a realistic chance of happening in 2015.

Now that the Republicans have real political power, they can't afford to continue a policy of simply thwarting President Barack Obama. If the GOP can't prove it can get something done in Washington, it will get thumped in 2016 just as soundly as the Democrats did yesterday (Tuesday).

That means focusing on issues for which the two parties can find common ground. And corporate tax reform tops the list.

So U.S. companies with overseas operations need to start paying attention to this issue now.

To be sure, it's been on Washington's radar for a long time.

Why Corporate Tax Reform Is Coming in 2015

The thing that gets politicians the most bothered is the $2.1 trillion-plus in profits that U.S corporations have parked outside the country. That's nearly double the amount in 2011.
corporate tax ratesAnd as long as that titanic pile of profits sits overseas, it can't be taxed. Democrats see those untaxed profits and dream of billions in revenue flowing into the U.S. Treasury.

Republicans would like to see corporations bring that money back to the United States to invest in their businesses here and create jobs.

Both sides are unhappy about the recent wave of corporate inversions. In those cases, a U.S. company merges with a foreign company and then moves its headquarters to the foreign country. Such companies then pay taxes at the lower rate of the new home country, while avoiding U.S. corporate taxes.

Members of both parties have expressed a willingness to work on corporate tax reform.

"President Obama has long advocated for reforming our tax code to make it more simple and fair, and he has been clear that he is willing to work with both parties to get that done," an Obama spokeswoman told The Hill last month.

In the wake of the Republican midterm victory, several GOP lawmakers have made similar statements. Both sides even have detailed proposals sitting on the shelf.

And fixing the corporate tax rate isn't controversial, either.

A poll by Public Opinion Strategies on the eve of the midterm elections found that 86% of Americans want tax reform. And 95% want Republicans and Democrats to work together to make it happen.

Businesses want to see tax reform, too - although that's not really surprising, given that the U.S. corporate tax rate of 35% is the highest in the world.

So this issue is ripe for action.

But for U.S. companies, there's just one problem...

Debate Over the Corporate Tax Rates Means Uncertainty

One reason the U.S. corporate tax rate remains stuck at 35%, despite calls from both Republicans and Democrats for a lower rate, is the gridlock that has gripped Washington for years.

But another reason is the lack of agreement on what the corporate tax rate should be. And, perhaps more importantly, what should be done about the loopholes and deductions that allow some U.S. companies to pay little or no tax.

So while U.S. multinational corporations are rooting for tax reform, the uncertainty over what Washington might end up doing could disrupt tax planning for the next several quarters.

Tax planning is an integral part of a company's overall business strategy. The prospect of a complete overhaul of the U.S. corporate tax code will force many companies to plan much more conservatively.

And it really is hard to say what sort of compromise might emerge.

Republicans want to lower the corporate tax rate from 35% to about 25%. Meanwhile, President Obama has proposed a tax rate of 28% for corporations and 25% for manufacturers.

But the really sticky part comes with exactly how to structure corporate tax reform to at least be "revenue neutral." That is, what rules do you change to keep the level of corporate tax revenue the same - or higher - despite a lower statutory rate?

Of course, whether any plan should aim to raise more revenue is among the thorny issues at hand. The GOP would be happy with a plan that kept corporate tax revenue level. But Democrats would like to see companies contributing more to the Treasury.

Other details are just as tricky. For example, the Obama plan would impose an annual tax on foreign profits so corporations can't shield that money indefinitely.

Meanwhile, a Republican proposal from Rep. Dave Camp, R-Mich., would require Congress to pay for the large variety of tax breaks it extends every year. These "tax extenders" are projected to cost the Treasury $450 billion over the next decade, so that would be a tall order.

How all this gets worked out is vital to U.S. companies trying to plan ahead, however.

But make no mistake. Fixing the corporate tax rates is the low-hanging fruit of bipartisan cooperation right now.

"You know, let's compare notes in terms of what I'm looking at and what they're looking at and let's get started on those things where we agree," President Obama said in a press conference today (Wednesday). "Even if we don't agree a 100%, let's get started on those things where we agree 70%, 80%, 90%."

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Why the Markets Love Midterm Elections: The Republican victory helped push the Dow Jones Industrial Average up 100 points Wednesday, but the news for investors gets better. Midterm elections have an almost-perfect track record of rewarding investors for months after the last vote is cast. This is a great argument for staying invested right now...
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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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