Thursday, July 7, 2011

Lower Corporate Tax Rates

Former President Bill Clinton approved the idea of reducing corporate tax rates to 25% in a televised interview last week.  That cut would be offset by the elimination of special interest tax deductions, leaving the immediate impact on Government revenues unchanged.  The measure actually might be enacted as part of the debt ceiling negotiations that currently are underway.  The deal could be structured so that both political parties could claim victory.  The American economy probably would benefit, too, by the more transparent and equitable system, and the lower marginal tax rate. 

Growth companies promise to be the biggest winners.  Most fast growing corporations pay cash taxes equal to the posted rate.  Larger, slower growing operations typically are the prime beneficiaries of tax dodging maneuvers.  The way things are set up now the Government effectively is draining cash from companies that earn the highest rates of return and subsidizing those with the lowest. 

The new approach, if enacted, would start to reverse that.  It also could provide a stock market jolt to the types of fast growing companies we focus on in Growth Stock Insider.  Earnings could rise 15% right off the bat due to the lower tax rate.  The availability of more cash to re-invest also could accelerate future income gains, perhaps causing P/E multiples to widen.

It remains to be seen if a deal will be made.  Things seem to be moving in that direction, though.  The overall stock market could gain as a result.  Growth stocks have the potential to make the largest moves.

Walter Ramsley
Executive Editor