President Obama’s Framework for Business Tax Reform has as one of its main elements a reduction in the top Corporate Income Tax Rate from 35% to 28%, a huge chunk of which is paid for by a dramatic reduction in tax benefits from Accelerated Tax Depreciation.
To be fair to all businesses, it only makes sense that this huge tax rate reduction would also apply at the individual tax level for any business income of Sub S corps, partnerships, and Schedule C income passed through to any business owner.
I think this key aspect of the Framework for Business Tax Reform is what makes it so massively powerful for US job creation and US economic growth.
It is pretty clear that 50% and 100% first-year bonus tax depreciation have been great for US Big Corporation earnings, but have not in the aggregate added a dime of US job creation by these same US Big Corporations.
On the other hand, a substantial permanent business tax rate reduction, especially one targeted predominantly at the lower levels of business income, is a very powerful US job creator.
Also, I think that once bright people figure out the impact of this trade off of income tax rate reduction for accelerated tax depreciation, the stock market will move up dramatically, assuming the stock market makes the determination that this aspect of the Framework will pass in a reasonably short period of time.
Common stock prices are driven by earnings.
This Framework will result in a massive increase in earnings for companies with their operations predominantly in the US.
Whereas a permanent tax rate reduction directly increases corporate earnings, a killing of accelerated tax depreciation deductions does not reduce corporate earnings.
Also, companies with massive investments in property and equipment will obtain an additional upfront first-year huge pickup in earnings from bringing down the US Federal Income Tax Rate on the Cumulative Accelerated Tax Depreciation Deductions it has already taken the benefit of.
This additional earnings benefit results from the reduction of the US Deferred Income Tax Liability related to the difference in the Book and Tax Basis of Property and Equipment from one where the US Federal Rate is now set up at 35% to the new reduced rate of 28%.
Let me explain the impact of this trade off more specifically by taking you around the country to its effect on many businesses in many different industries.
The basic concept is that everything else being equal, the market price of the common stock of the company operating only in the US should increase by the continuing annual percentage increase in earnings, caused by this switch from Accelerated Tax Depreciation Benefits to a 7% income tax rate reduction.
For pure domestic companies, and just looking at this trade off, the continuing annual earnings increase should be mostly about 11%.
My focus below is on specific large companies with US Pretax Income in the most recent year above $500 mil, and which also have the majority of their consolidated earnings generated in the US. I am also including some companies not making the US Pretax Earnings threshold but with a very large net Deferred Income Tax Liability position at the end of the most recent year.
I started out in my earlier Part One post with large companies in the US Southeast. And in my Part Two earlier post, I added large companies in the US Midwest.
Let me now move in this Part Three post to large companies with the majority of their US Profits in the US Heartland States.....Nebraska, Oklahoma, Missouri, Kansas, Arkansas, and the Dakotas .....historically all great college sports hotbeds, and yeah even Phil Jackson.
NEBRASKA
Berkshire Hathaway
The exceptionally well run, Omaha, NE-based Conglomerate Berkshire Hathaway generated Worldwide Pretax Income of $15,314 mil in 2011. It didn’t disclose its US Pretax Income. However, its US Revenue Mix in 2011 was 86%, as was its US Total Income Tax Expense Mix. Thus, I’ll make the assumption that its US Pretax Income Mix in 2011 is also 86%, and thus $13,170 mil.
Berkshire Hathaway’s Total Income Tax Expense in 2011 was $4,568 mil, for an effective income tax rate of 29.8%. This income tax rate was helped primarily by 2011 tax benefits of $497 mil related to Dividend Received Tax Deductions and Tax Exempt Income. Tax Credits of $241 mil in 2011 also helped lower its effective income tax rate.
And thus its After-tax Net Income in 2011 was $10,746 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Berkshire Hathaway would have reduced its income tax expense in 2011 by roughly 7% X $13,170 mil, or by a huge $922 mil. And thus, its 2011 After-tax Net Income would have increased by 9%, or by $922 mil divided by $10,746 mil.
In addition, Berkshire Hathaway had a net Deferred Income Tax Liability of a gigantic $37,105 mil at the end of 2011, with $28,414 mil of it caused by its heavy investment in Property, Plant and Equipment, mainly due to its Railroad, Utility and Energy Operations. For just the Property, Plant and Equipment (91% located in the US) portion of the net Deferred Income Tax Liability, and ignoring state income taxes, Berkshire Hathaway's related US federal Deferred Income Tax Liability would have to be reduced by a gigantic $5,683 mil, and thus it would have recorded an additional income tax benefit, and thus additional After-tax Net Income, of a monstrous $5,172 mil in 2011, due to the President’s perceptive trade off.
Therefore in total, the After-tax Net Income of Berkshire Hathaway would have increased by $6,093 mil in 2011 for the above two items, yeah that's a massive $6.1 bil, by this key trade off included in the Obama Administration's wise Framework For Business Tax Reform. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Berkshire Hathaway, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to reduce the transportation, utility, and energy costs of customers of certain Berkshire Hathaway segments. And it also seems fair that some of these additional Berkshire Hathaway earnings should be used by Berkshire Hathaway doing its part in helping solve the country's long-term energy problem by making wise, measured, patriotic investments in things like mass transit. And most important of all, it also only seems fair that some of these additional earnings should be used to hire additional full-time employees.
Union Pacific
The very well run, Omaha, NE-based Union Pacific, which operates just in the US, generated Pretax Income of $5,264 mil in 2011. Its Total Income Tax Expense was $1,972 mil, for an effective income tax rate of 37.5%. And thus its After-tax Net Income in 2011 was $3,292 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Union Pacific would have reduced its income tax expense in 2011 by roughly 7% X $5,264 mil, or by a huge $368 mil. And thus, its 2011 After-tax Net Income would have increased by 11%, or by $368 mil divided by $3,292 mil.
In addition, Union Pacific had a net Deferred Income Tax Liability of a gigantic $12,062 mil at the end of 2011, caused by its heavy investment in Properties, as do all railroad corps. Thus, ignoring state income taxes, its US federal Deferred Income Tax Liability would have to be reduced by $2,412 mil, and thus it would have recorded an additional income tax benefit, and thus additional After-tax Net Income, of a monstrous $2,412 mil in 2011, due to this trade off.
Therefore in total, the After-tax Net Income of Union Pacific would have increased by $2,780 mil in 2011, yeah that's nearly $2.8 bil, by this key trade off included in the Obama Administration's wise Framework For Business Tax Reform. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Union Pacific, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to reduce the transportation costs Union Pacific charges all of its customers, particularly its small business customers. And some of these additional Union Pacific earnings should also be used by Union Pacific doing its part in helping solve the country's long-term energy problem by making wise, measured, patriotic investments in things like mass transit.
ConAgra Foods
TD Ameritrade
OKLAHOMA
Devon Energy
Oklahoma City, OK-based Oil & Gas Corp Devon Energy Corp generated US Pretax Income of $3,477 mil in 2011, which was 81% of its Worldwide Pretax Income of $4,290 mil in 2011.
Its Total Income Tax Expense in 2011, on a book basis, was $2,156 mil, driven higher by an assumed additional income tax from an assumed foreign earnings repatriation.
But much more importantly, Devon Energy’s current US federal income tax paid on this $3,477 mil of US Pretax Income in 2011 was None…..in fact, it received a $143 mil US federal income tax refund related to its $3,477 mil of US Pretax Income generated in 2011. Go figure! It’s just incredible the lucrative US tax benefits these Oil and Gas Corps receive.
Thus, Devon Energy’s After-tax Net Income in 2011 was $2,134 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Devon Energy would have reduced its income tax expense in 2011 by 7% X $3,477 mil, or by a huge $243 mil. And thus, its 2011 After-tax Net Income would have increased by 11%, or by $243 mil divided by $2,134 mil.
In addition, Devon Energy had a net Deferred Income Tax Liability of $4,925 mil at the end of 2011, caused predominantly by the huge tax subsidies related to its large investment in Properties, just like other Oil and Gas Corps have. Of that $4,925 mil Deferred Income Tax Liability, 69% of the Property is located in the US. Thus, ignoring state income taxes, and assuming that 69% of this Deferred Income Tax Liability relates to the US, Devon Energy would reduce its Deferred Income Tax Liability by roughly a huge $680 mil, and thus it would have recorded an additional income tax benefit, and thus additional After-tax Net Income, of roughly $680 mil in 2011, due this trade off.
Therefore in total, the After-tax Net Income of Devon Energy would have increased roughly by a huge $923 mil in 2011, by this key trade off included in the Obama Admin For Business Tax Reform. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
When you read all of the above, all US citizens should be outraged. Everyone in the US Congress who voted for these monstrous tax subsidies for the Oil and Gas industry should be removed from office. They are not working for the 99%, but only working for the 1% Big Oil and Gas Corps. And anyone in the US Congress, both Democrats and Republicans, who vote for a continuation of these massive tax subsidies, which you can see from the above trade offs, are even getting much more enhanced to the tune of roughly $923 mil of additional after-tax earnings in one year for just one company, Devon Energy, clearly should be voted out of office.
I think this is why you see that many members of the US Congress from US States like Texas and Oklahoma, who are huge supporters of Big Oil, are spending all of their time trying to reduce the US Deficit solely through cost cuts. They are successfully getting the country to move the conversation away from the massive tax subsidies that have been given to Big Oil.
Chesapeake Energy
Williams Companies
ONEOK
Continental Resources
Helmerich & Payne
OGE Energy
MISSOURI
Emerson Electric
Express Scripts
The St. Louis, MO-based Pharmacy Benefit Management Company Express Scripts generated Pretax income for 2011 of $2,024 mil, nearly all in the US. Its Income Tax Expense in 2011 was $749 mil, for an effective income tax rate of 37.0%. And thus its After-tax Net Income in 2011 was $1,276 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Express Scripts would have reduced its income tax expense in 2011 by $142 mil, or by 7% X $2,024. And thus, its 2011 After-tax Net Income would have increased by 11%, or by $142 mil divided by $1,276 mil. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Express Scripts, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to reduce the exorbitantly high drug prices that Express Scripts charges. By such fair, patriotic action, the long-term US health care cost curve will be bent down, which is so critical to substantially reducing the US deficit and making US businesses much more competitive.
Monsanto
Peabody Energy
O'Reilly Automotive
H&R Block
Ameren Corp
Great Plains Energy
Charter Communications
Kansas City Southern
ARKANSAS
Wal-Mart Stores
Bentonville, AR-based Giant Retailer Wal-Mart Stores hasn’t filed its annual report with the SEC for the fiscal year ended (FYE) Jan 2012 yet, thus the below numbers all relate to the FYE Jan 2011.
Wal-Mart generated US Pretax Income of $18,398 mil in FYE Jan 2011, which was 78% of its Worldwide Pretax Income of $23,538 mil.
Its Consolidated Total Income Tax Expense, on a book basis, was $7,579 mil, for an effective income tax rate of 32.2%.
Its US Current Federal Income Tax Paid or Payable related to its FYE 2011 earnings was $4,600 mil, for a current effective US federal income tax rate of a much lower 25.0% on its US Pretax Income in FYE 2011 of $18,398 mil.
And thus its Consolidated After-tax Net Income in FYE 2011 was $15,959 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of FYE Jan 2011, Wal-Mart would have reduced its income tax expense in FYE Jan 2011 by roughly 7% X $18,398 mil, or by $1,288 mil. And thus, its FYE Jan 2011 Consolidated After-tax Net Income would have increased by 8%, or by $1,288 mil divided by $15,959 mil. And its Equivalent Pretax Income in FYE Jan 2011 would have increased by substantially more, by this key trade off.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Wal-Mart, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to move more of Wal-Mart’s many part-time workers to full-time status, to elevate the wages of its workers to a much more livable status, to hire additional full-time workers, and to also reduce the prices it charges its customers.
Wal-Mart Deferred Income Tax Liability at the end of Jan 2011 includes items related to two substantial tax loopholes…..to Property, Plant and Equipment ($4,818 mil) and strangely also to Inventory ($1,014 mil). In all fairness, I think these two tax loopholes should both be closed in exchange for the 7% lower US federal income tax rate.
And the IRS continues to show its allegiance to the 1% Big Corps by knuckling under to the awesomely powerful Wal-Mart in its tax audit settlements. Wal-Mart recorded tax audit settlements with tax authorities reducing its income tax liability cushion by $453 mil in 2011, by $340 mil in 2010, and by another $238 mil in 2009. And simultaneously, the IRS continues its wholescale harassment of small businesses and individuals.....the 99%.....in menacing, never-ending, patently unfair 100% transaction tax audits.
Tyson Foods
Windstream
Murphy Oil (US Pretax Income $441 mil and Foreign Pretax Income $1,110 mil)
KANSAS
Sprint Nextel
Westar Energy
NORTH DAKOTA
MDU Resources
SOUTH DAKOTA
Northwestern Corp
Black Hills Corp
Much more to come!
