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%.
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. And then in my Part Three earlier post, I added large companies in the US Heartland.
Let me now move in this Part Four post to large companies with the majority of their US Profits in the US Northeast States, other than New York, which because of its size, I will later be handling in a separate post. What I find is that the financial expertise of those in the US Congress generally steps up demonstrably as you move to the US Northeast.
As an introduction here, let me first show the Corps in Northeast US States with Worldwide Pretax Income above $1 bil in the most recent year 2011, and which also have a majority of their worldwide income earned overseas, along with what percentage of this income was earned in Foreign Countries.
……………..…….......................Worldwide
……………….……........................Pretax……….Foreign
………………….….......................Income………Income
……..…………......................(mils of dollars)…..Mix
Johnson & Johnson.......NJ.....12,361.............71%
United Technologies.....CT.......7,605.............57%
Merck...........................NJ.......7,334.............64%
Prudential Financial......NJ.......5,117.............65%
DuPont.........................DE.......4,282.............80%
EMC.............................MA......3,249.............55%
State Street Corp..........MA......2,536.............67%
Danaher.......................DC.......2,448.............52%
Praxair........................CT........2,323.............67%
Honeywell...................NJ........2,282.............86%
Covidien Ltd................MA......2,216.............87%
Tyco Ltd......................NJ.......1,893............112%
Air Products & Chems..PA.......1,661.............58%
TE Connectivity Ltd.....PA.......1,629.............84%
PPG Industries.............PA.......1,597.............56%
Celgene........................NJ.......1,420.............71%
HJ Heinz......................PA.......1,374.............59%
Priceline.com..............CT........1,368.............89%
Cognizant Tech Sols.....NJ........1,169.............71%
Alcoa..........................PA........1,063...........109%
Analog Devices...........MA.......1,061.............66%
When you review the above numbers of these 21 Global US Northeast Giants, you have to be very impressed and feel very good for the country.
However, that's only the Pretax Income perspective, which indeed is quite good.
It would be helpful to also focus on the global tax aspect of several of these companies.
Johnson & Johnson (JNJ)
JNJ's 2011 US Pretax Income in 2011 comprised 29% of its Worldwide Pretax Income. On the other hand, its US Revenues in 2011 comprised a much larger 44% of its Worldwide Revenues. And its US Total Long-term Assets also comprised a much larger 49% of its Worldwide Total Long-term Assets.
So why would a Big Pharma Corp like JNJ focus so intently on shifting income from the US to Foreign?
Well, let me quantify the benefit.
JNJ received foreign tax breaks from having it foreign earnings taxed at lower rates than that in the US which totaled $1,953 mil in 2011, another $2,135 mil in 2010, and another $1,859 mil in 2009.
Thus, JNJ's Effective Income Tax Rate, on a book basis, was only 21.8% in 2011, and even a lower 21.3% in 2010.
As a result of this massive income shift, JNJ has unremitted foreign earnings of a massive $41.6 bil at the end of 2011.
Clearly, the US Congress has no business giving companies which overdose on shifting US income to lower foreign tax havens, like JNJ does, a tax free holiday to repatriate these foreign earnings.
But every Republican in the US Congress want companies like JNJ to get this tax holiday. And so do some Democrats. And the US Congress doesn't understand why the 99% is so disappointed in them? And they also don't understand why their favorable approval ratings are so incredibly low, and headed much lower?
DuPont
But this massive global income shifting, so detrimental to the 99%, is not just being done in the US Big Pharma Industry.
DuPont's 2011 US Pretax Income in 2011 comprised 20% of its Worldwide Pretax Income. On the other hand, its US Revenues in 2011 comprised a much larger 35% of its Worldwide Revenues. And its US Total Net Property Assets also comprised a substantially larger 65% of its Worldwide Total Net Property Assets.
So why would a Big Manufacturing Corp like DuPont focus so intently on shifting income from the US to Foreign?
Well, let me quantify the benefit.
DuPont received foreign tax breaks from having it foreign earnings taxed at lower rates than that in the US which totaled $480 mil in 2011 and another $553 mil in 2010.
Thus, DuPont's Effective Income Tax Rate, on a book basis, was only 18.0% in 2011, and even a lower 17.8% in 2010.
As a result of this massive income shift, DuPont has accumulated unremitted foreign earnings of $13.4 bil at the end of 2011.
And the US Congress doesn't understand why the 99% is so disappointed in them? And they also don't understand why their favorable approval ratings are so incredibly low, and headed much lower?
These highly unusual situations above tell you why the President’s Framework for Business Tax Reform is so important to prevent these clearly unfair situations to the 99% of the country from continuing to happen.
President Obama’s Framework for Business Tax Reform has some incredibly powerful incentives to entice the above companies and many others to insource back to the US a huge chunk of these massive foreign earnings as well as the related jobs.
First, these foreign earnings shifted back to the US will be granted a 7% US federal income tax rate deduction.
Second, these foreign earnings shifted back to the US will be able to avoid a US federal minimum income tax on their foreign earnings. This provision is particularly focused in a fair manner at companies which overdose in shifting US income and the related US jobs overseas.
And third, there’s a special tax break for the costs of companies moving their operations back to the US.
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.
CONNECTICUT
General Electric
Aetna
Hartford, CT-based Health Insurance Giant Aetna generated Pretax income for 2011 of $3,078 mil, all in the US.
Its Income Tax Expense, on a book basis, in 2011 was $1,092 mil, for an effective income tax rate of 35.5%.
And thus its After-tax Net Income in 2011 was $1,986 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Aetna would have reduced its income tax expense in 2011 by a huge $215 mil, or by 7% X $3,078. And thus, its 2011 After-tax Net Income would have increased by 11%, or by $215 mil divided by $1,986 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 Aetna, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to reduce the exorbitantly high insurance premiums that Aetna charges. By such fair, patriotic actions, US Big Health Insurance Corps will bend down the long-term US health care cost curve, which is so critical to substantially reducing the US deficit and making US businesses, especially smaller ones, much more competitive.
Cigna
Bloomfield CT-based Health Insurance Giant Cigna generated Pretax income for 2011 of $1,968 mil, 85% of it, or roughly $1,673 mil in the US.
Its Income Tax Expense, on a book basis, in 2011 was $640 mil, for an effective income tax rate of 32.5%.
And thus its After-tax Net Income in 2011 was $1,328 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Cigna would have reduced its income tax expense in 2011 by roughly $117 mil, or by 7% X $1,673. And thus, its 2011 After-tax Net Income would have increased by 9%, or by $117 mil divided by $1,328 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 Cigna, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to reduce the exorbitantly high insurance premiums that Cigna charges. By such fair, patriotic actions, US Big Health Insurance Corps will bend down the long-term US health care cost curve, which is so critical to substantially reducing the US deficit and making US businesses, especially smaller ones, much more competitive.
Hartford Financial Services Group
Xerox
Interactive Brokers Group
Frontier Communications
WASHINGTON DC
Pepco Holdings
WGL Holdings
DELAWARE
SLM Corp
MASSACHUSETTS
Raytheon
Well run, Waltham, MA-based US Defense Contractor Raytheon generated US Pretax Income of $2,604 mil in 2011, 97% of its Worldwide Pretax Income of $2,690.
Its Total Income Tax Expense, on a book basis, in 2011 was $793 mil, for an effective income tax rate of a modest 29.5%. And it effective income tax rate in 2010 was an even lower 24.2%!
What’s with these lower effective income tax rates?
The largest portion is from very favorable tax settlements with the IRS in tax audits. The tax benefits received here were $70 mil in 2011 and another $195 mil in 2010. This is one of the many reasons the 99%, including small businesses, are so upset with the US Government. The IRS completely and continually caves in to the 1% Big Corps like Raytheon in its tax audits, while simultaneously ruthlessly pursuing small businesses and individuals in never-ending, very time consuming, patently unfair, 100% transaction tax audits.
Anyway, Raytheon’s After-tax Net Income in 2011 was $1,897 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Raytheon would have reduced its income tax expense in 2011 by $182 mil, or by 7% X $2,604 mil. And thus, its 2011 After-tax Net Income would have increased by 10%, or by $182 mil divided by $1,897 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 US Defense Contractor Raytheon, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be offset by the US Government reducing substantially the amounts it pays to US Defense Contractors like Raytheon in its many huge dollar US Government contracts with them. This wise US Government cost-cutting initiative will help much to reduce the US Deficit.
The TJX Companies
Extremely well run, Framingham, MA-based Retailer The TJX Companies (TJX) generated US Pretax income for FYE Jan 2012 of $2,411 mil. Assuming the same 84% US Pretax Income mix as that in FYE Jan 2011, TJX’s US Pretax Income in FYE Jan 2012 would be $2,025 mil.
Its Income Tax Expense in 2012, on a book basis, was $915 mil, for an effective income tax rate of 38.1%. And thus its After-tax Net Income in 2012 was $1,496 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of FYE Jan 2012, TJX would have reduced its income tax expense in FYE 2012 by roughly $142 mil, or by 7% X $2,025. And thus, its FYE Jan 2012 After-tax Net Income would have increased by 9%, or by $142 mil divided by $1,496 mil. And its Equivalent Pretax Income in FYE Jan 2012 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 TJX, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to move more of TJX’s 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.
Biogen IDEC
Staples
Thermo Fisher Scientific
Northeast Utilities
American Tower
Nstar Electric
MARYLAND
Lockheed Martin
Bethesda, MD-based US Defense Contractor Lockheed Martin generated Pretax Income of $3,631 mil in 2011, predominantly all in the US.
Its Total Income Tax Expense, on a book basis, in 2011 was $964 mil, for an effective income tax rate of a modest 26.5%, helped by a US manufacturing tax benefit of $106 mil and by very favorable IRS tax audit settlements resulting in a tax benefit of another $89 mil.
Lockheed Martin’s After-tax Net Income in 2011 was $2,667 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Lockheed Martin would have reduced its income tax expense in 2011 by roughly a huge $254 mil, or by 7% X $3,631 mil. And thus, its 2011 After-tax Net Income would have increased by 10%, or by roughly $254 mil divided by $2,667 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 US Defense Contractor Lockheed Martin, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be offset by the US Government reducing substantially the amounts it pays to US Defense Contractors like Lockheed Martin in its many huge dollar US Government contracts with them. This wise US Government cost-cutting initiative will help much to reduce the US Deficit.
T Rowe Price Group
Coventry Health Care
Constellation Energy
NEW JERSEY
Medco Health Solutions
Franklin Lanes, NJ-based Pharmacy Services Corp Medco Health Solutions generated Pretax income for 2011 of $2,376 mil, nearly all in the US.
Its Income Tax Expense, on a book basis, in 2011 was $920 mil, for an effective income tax rate of 38.7%.
And thus its After-tax Net Income in 2011 was $1,456 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Medco Health Solutions would have reduced its income tax expense in 2011 by $166 mil, or by 7% X $2,376. And thus, its 2011 After-tax Net Income would have increased by 11%, or by $166 mil divided by $1,456 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 Medco Health Solutions, 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 Medco Health Solutions 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.
Automatic Data Processing
Roseland, NJ-based Payroll Processing Giant Automatic Data Processing (ADP) generated US Pretax Income of $1,675 mil in FYE June 2011, 87% of its Worldwide Pretax Income of $1,933 mil.
Its Total Income Tax Expense, on a book basis, in FYE June 2011 was $679 mil, for an effective income tax rate of 35.1%.
Thus, ADP’s After-tax Net Income in FYE June 2011 was $1,254 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of FYE June 2011, ADP would have reduced its income tax expense in FYE June 2011 by $117 mil, or by 7% X $1,675 mil. And thus, its FYE June 2011 After-tax Net Income would have increased by 9%, or by $117 mil divided by $1,254 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 ADP, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used by ADP to reduce its fees charged to small businesses, thereby permitting these businesses to be much more competitive.
Chubb
Hudson City Bancorp
Bed Bath & Beyond
Campbell Soup
Becton Dickinson
Quest Diagnostics
Publix Service Enterprise Group
NRG Energy
American Water Works
PENNSYLVANIA
Comcast
The very well run, Philadelphia, PA-based Cable Giant Comcast Corp, generated Pretax Income of a massive $8,207 mil in 2011, predominantly in the US . Its Total Income Tax Expense, on a book basis, was $3,050 mil, for an effective income tax rate of 37.2%. And thus its After-tax Net Income in 2011 was $5,157 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Comcast would have reduced its income tax expense in 2011 by roughly 7% X $8,207 mil, or by a gigantic $574 mil. And thus, its 2011 After-tax Net Income would have increased by 11%, or by $574 mil divided by $5,157 mil.
In addition, Comcast had a net Deferred Income Tax Liability of a massive $29,707 mil at the end of 2011, caused by its heavy investment in Properties and Intangible Assets. Thus, ignoring state income taxes, its US federal Deferred Income Tax Liability would have to be reduced by roughly $5.9 bil, due to this trade off. A significant part of this $5.9 bil would be used to increase After-tax earnings of Comcast in the first year.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Comcast, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to reduce the fees Comcast charges to all of its customers, particularly its small businesses and individuals.
PNC Financial Services
Pittsburgh, PA-based Bank Giant PNC Financial Services Group (PNC), which operates just in the US, generated Pretax Income of $4,069 mil in 2011.
PNC’s Total Income Tax Expense, on a book basis, in 2011 was only $998 mil, for an effective income tax rate of a very modest 24.5%.
But it’s not just 2011. PNC’s effective income tax rate, on a book basis, was only 25.5% in 2010, and only 26.9%.
Thus, taking all of the most recent three years combined, PNC generated Total Pretax Income of $11,355 mil, had Total Income Tax Expense, on a book basis, of $2,902 mil, for an effective income tax rate of only 25.6%.
So what’s with PNC’s incredibly low effective income tax rate?
It’s all about the number and massive amounts of tax subsidies that the US Congress has granted to them.
First and foremost, PNC received total credits of $208 mil in 2011, $175 mil in 2010, and $174 mil in 2009.
Second, PNC received tax benefits from tax exempt interest of $69 mil in 2011, $53 mil in 2010, and $39 mil in 2009.
Third, PNC received tax benefits from dividend received tax deductions of $65 mil in 2011, $57 mil in 2010, and $39 mil in 2009.
Fourth, PNC received tax benefits from life insurance of $65 mil in 2011, $73 mil in 2010, and $61 mil in 2009.
And fifth, PNC received the tax benefit of favorable IRS tax settlements of $102 mil in 2010.
But it gets worse.
How much total US federal income tax did PNC pay on this massive $11,355 mil of Pretax Income earned in the most recent three years?
In total, none. Instead, it received a total US federal income tax refund in those three years combined of $125 mil.
In addition, PNC also has taken advantage of very favorable tax-advantaged leasing, which has resulted in a very favorable related Deferred Income Tax Liability of $1,150 mil.
And banks like PNC still wonder why the Occupy Wall Street Movement is so vibrant, and will continue to be even more so as the winter weather subsides.
Anyway, PNC benefits from the President’s trade off proposal, which reduces the income tax rate of income by 7%.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of PNC, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to write down the principal balances of underwater home mortgages, to permit underwater homeowners to refinance their mortgages at the existing lower interest rates, to make more loans to small businesses, and to also charge a more reasonable interest rate on small business loans.
Further, these huge annual tax subsidies PNC and other large financial institutions now receive should be eliminated.
AmeriSourceBergen
Hershey
CONSOL Energy
Universal Health Services
Mylan Inc
EQT Corp
ACE, Ltd
Lincoln National
PPL Corp
Allegheny Energy
RHODE ISLAND
CVS Caremark
The very well run, Woonsocket, RI-based Drug Retail Giant CVS Caremark generated Pretax income for 2011 of $5,746 mil, all in the US. Its Income Tax Expense in 2011, on a book basis, was $2,258 mil, for an effective income tax rate of 39.3%. And thus its After-tax Net Income in 2011 was $3,488 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of FYE 2011, CVS Caremark would have reduced its income tax expense in 2011 by a huge $402 mil, or by 7% X $5,746. And thus, its 2011 After-tax Net Income would have increased by 12%, or by $402 mil divided by $3,488 mil. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In addition, CVS Caremark had a net Deferred Income Tax Liability of $3,350 mil at the end of 2011, caused by its heavy investment in Property and Equipment. Thus, ignoring state income taxes, its US federal Deferred Income Tax Liability would have to be reduced by $670 mil, and thus it would have recorded an additional income tax benefit, and thus additional After-tax Net Income, of $670 mil in 2011, due to this trade off.
Therefore in total, the After-tax Net Income of CVS Caremark would have increased by $1,072 mil in 2011, yeah that's nearly $1.1 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 CVS Caremark, 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 CVS Caremark 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. Also in all fairness, some of these additional earnings should be used by CVS to both move more of its part-time workers to full-time status, and to increase the pay of its employees.
Much more to come!
