The GOP’s tax reform bill, signed into law at the end of December, is designed to stimulate economic growth by encouraging companies to invest in the domestic economy, a development experts expect to come to fruition over the coming months.
“[U.S. companies are] going to have a lot more net income, a lot more profits to allocate somewhere … I would expect capital spending to surge,” Tom Landstreet, founder and CEO of N3L Capital Partners, told FOX Business.
The administration is hoping to hit 4% GDP growth, and increased capital investment plays an important role in getting there. There are a few primary ways the tax bill could achieve increased U.S. investment. One is the 14 percentage point reduction in the U.S. corporate tax rate, to 21% from 35%, making the U.S. more competitive with other developed countries. Another is the one-time repatriation charge that companies will pay if they bring back money from overseas, eliminating all subsequent layers of taxation.
As a result of these provisions, Scott Greenberg, a senior analyst at the Tax Foundation, said it is likely companies will repatriate profits and, consequently, have extra cash on hand.
There are a number of ways corporations can deploy that spare cash. From share buybacks to paying off debt or other immediate expenses to raising wages, not all policies are created equal where growth is concerned.
Since investments grow the economy, the big question is whether, at the end of the day, the money is “being poured into more investment on the part of businesses or more consumption on the part of shareholders.”
Even while the economy has strengthened, capital investment has remained weak. Along with a high corporate tax rate, regulation can help explain why companies have been hesitant to invest in the domestic economy.
“Obama’s administration … regulated everything that moved wiggled or crawled. So business sentiment has been very low because companies have been worried about future legislation,” Landstreet said. “All of that is going to reverse under Donald Trump … I guarantee you these numbers are going to flip.”
A number of companies, including Boeing (NYSE:BA) and AT&T (NYSE:T), have already committed to awarding bonuses to employees.
There is also another specific incentive in the new tax bill designed to incite an increased level of capital investment by allowing businesses to deduct the full cost of their investments.
Greenberg noted that the bill, overall, is likely to encourage amplified aggregate investment, which would result in “increased output over the long run.”
Meanwhile, Landstreet, like the administration, sees 4% GDP growth as an achievable target.