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.
These 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%.
Here are the earlier posts I have made so far related to large companies headquartered in States in the various parts of the US.
Part One Post…....US Southeast
Part Two Post.…..US Midwest
Part Three Post….US US Heartland, other than Texas
Part Four Post…..US Northeast, other than New York
Part Five Post…...US West, other than California
Part Six Post……..California
Part Seven Post…Texas
Let me now move in this Part Eight post to large companies with the majority of their US Profits in the State of New York. Clearly, Big Financial Corps are huge in the New York landscape.
As an introduction here, let me first show the New York Corps 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
IBM………….…….….......21,003……….…54%
Citigroup...……………....14,624………….88%
Pfizer…………...............12,762………...118%
Phillip Morris Intl……..12,532……..…100%
PepsiCo………………….....8,834…………..55%
Colgate Palmolive………3,789…………..71%
Corning………….…….......3,213…………..70%
Hess……………………........2,461…………..91%
Omnicom Group………...1,549….……….62%
Marsh & McLennan…….1,404…………..91%
Forest Labs…………….....1,338………….75%
Estee Lauder……………...1,026…………116%
Frankly, there is something seriously wrong with US Tax Policy when Pfizer generates US Pretax Losses of $(2.3) bil in 2011, $(2.5) bil in 2010, and $(3.7) bil in 2009, while at the same time, generating massive amounts of Foreign Pretax Income of $15.0 bil in 2011, $11.8 bil in 2010, and $14.4 bil in 2009.
And then at the same time, Pfizer's US Revenues comprised 40% of its Worldwide Revenues in 2011, and its US Property, Plant and Equipment (PPE) comprised 47% of its Worldwide PPE. Go figure!
But it’s not just Pfizer. Other Big Pharma Corps have a similar situation where because of the way their worldwide income is allocated, their US Pretax Income Mix falls substantially short of both their US Revenue Mix and US Asset Mix.
This highly unusual situation tells you why the President’s Framework for Business Tax Reform is so important to prevent this clearly unfair situation to the 99% of the country from continuing to happen. It has some awfully powerful components to prevent this worldwide income allocation so unfair to the 99% from happening.
And it also tells you why the majority of the US Congress, which supports such an incredibly low allocation by Big Pharma Corps and other Big Corps of their massive Worldwide Income to the US, has such a low approval rating, which is headed much lower. US citizens are just fed up with the Big Pharma Corps and other Big Corps receiving these massive US tax breaks, year after year, even while, at the same time, they are generating huge foreign pretax profits, much of it taxed very modestly in foreign tax havens.
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.
Now, I’ll focus below on specific large New York 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.
Financial Corps
JPMorgan Chase
New York, NY- based Financial Giant JPMorgan Chase generated US Pretax Income of a massive $16,336 mil in 2011, 61% of its Worldwide Pretax Income of $26,749 mil.
JPMorgan Chase’s US Current Federal Income Tax Paid or Payable related to its US Pretax Income for the most recent two years 2011 and 2010 was only 23.5%.
Why the low effective income tax rate?
Well, JPMorgan Chase must be doing a very effective job in lobbying the US Congress.
Check out these two tax subsidies totaling $1.6 bil JPMorgan Chase received just in the year 2011.
…..Tax Credits………………….$1,070 mil
…..Tax-exempt Interest………$562 mil
…..Total………………..………...$1,632 mil
And it’s not just in 2011. These same two tax subsidies to JPMorgan Chase totaled $1,517 mil in 2010 and $1,511 mil in 2009.
And we wonder why the US Deficit is so large?
And the US Congress, supporting these massive tax breaks for US Big Financial Corps, wonder why its favorable approval ratings are so low, and headed much lower?
And the Big Financial Corps wonder why the Occupy Movement so intensely focuses on them?
Well, just how would JPMorgan Chase come out on the tradeoff between a 7% lower US federal income tax rate and the elimination of Accelerated Tax Depreciation?
Well, would you believe…..very well? It’s true.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, JPMorgan Chase would have reduced its income tax expense in 2011 by roughly a massive $1,144 mil, or by 7% X $16,336 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2010, JPMorgan Chase would have reduced its income tax expense in 2010 by roughly a massive $1,160 mil, or by 7% X $16,568 mil.
And its Equivalent Pretax Income in 2011 and 2010 would have increased by substantially more by this tradeoff.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of JPMorgan Chase, 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, to charge a more reasonable interest rate on small business loans, and to also reduce the exorbitant interest rates and fees related to its credit card loans.
Further, these huge annual tax subsidies JPMorgan Chase and other large financial institutions now receive should be eliminated.
American Express
Goldman Sachs
MetLife
Morgan Stanley
BlackRock
Bank of New York Mellon
Mastercard
M&T Bank
Assured Guaranty Ltd
New York Community Bank
Assurant
HSBC USA
AIG
Non Financial Corps
Verizon Communications
Bristol Myers Squibb
Time Warner
Well run, New York, NY-based Time Warner generated US Pretax Income of $4,285 mil in 2011, 98% of its Worldwide Pretax Income of $4,366 mil.
Time Warner’s Total Income Tax Expense, on a book basis, in 2011 was $1,484 mil, for an effective income tax rate of 34.0%. And this effective income tax rate was 34.4% in 2010.
Clearly, Time Warner is doing its part to reduce the massive US Deficit.
Thus, Time Warner’s After-tax Net Income was $2,882 mil in 2011.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Time Warner would have reduced its income tax expense in 2011 by roughly a huge $300 mil, or by 7% X $4,285 mil.
Thus, Time Warner’s 2011 After-tax Net Income would have increased by 10%, or by $300 mil divided by $2,882 mil, due to the wise tradeoff in the Obama Administration’s Framework for Business Tax Reform.
News Corp
Viacom
Time Warner Cable
CBS
Consolidated Edison
Loews
L-3 Communications
McGraw-Hill
Coach
Constellation Brands
Paychex
CA Inc
Leucadia National
Ralph Lauren Corp
PVH Corp
