Whether a Cut in Corp Tax Rate be Beneficial
Doesn’t everyone want to keep what he/she has earned? It has always been somewhat tradition for Americans to work hard for their money, only to see some of it squandered away come tax time. Wouldn’t a tax cut, for some, be like a divine, heavenly grace? As the year 2001 unfolds and George W. Bush begins his presidency, income tax rates have, in fact, become a concern. President Bush is pushing for an income tax bill that will reduce the tax brackets from 15%, 28%, 31%, 36%, and 39.6% to a new bracket in 2006 of 10%, 15%, 25%, and 33%. A cut in individual income taxes would benefit most Americans and is well deserved. However, there is no plan to cut the corporate tax rates yet. A hypothetical decline to the corporate tax rates could spawn a number of possibilities for firms and/or even influence the market. However, will a decline in the corporate tax rate positively influence market volume and different firms’ financial activities (i.e. investing, repurchasing, options)? A question of this nature can be answered through analysis of the benefits or detriments obtained by two companies due to the reduction.
There is a basic relationship between the market volume and corporate tax rates. A decrease in the corporate rates would allow companies to pay less on their earnings, leaving them with more Net Income (NI). With this increase in net income, a company can afford to invest in other areas or it allows them to repurchase their stock. By repurchasing stock, the market volume drops by the amount of stock that has been bought back. In addition, buying back shares can affect the overall outcome of the market that day depending on the company engaging in the repurchase. A company with a large stake in the market who buys back a considerable amount of stock will cause a greater fluctuation in the volume. In buying shares, the overall value of the market will rise due to the price increases that occur. If the opposite occurs, the tax rate is increased; some firms may have different decisions to make. Because an increase in the tax rate affects a company’s net income in a negative manner, funds for operations and other activities will become diminished. With the net income being less significant, a firm may need to participate in a form of either debt or equity financing to obtain funds needed to operate. Upon re...
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...is beneficial depends on the company in which the tax cut will be implemented on. For Ford Motor Company, a tax cut might work to their favor. By decreasing the rate, Ford’s return on equity will increase. However, Merck & Co. may hope for a veto of that tax cut. With a cut they would be increasing their cost of debt, in which they have excess financing ($161 billion). They would also lose out on their tax shield from the interest on their debt. Overall, the economy, the market, and the individual sectors seem to be doing well. To tamper with things now would almost certainly throw a wrench into what the Fed has already done to try and stimulate the economy. To follow in the old proverb, “If it isn’t broke then don’t try to fix it.” Benefits and detriments are, in this scenario, purely reliant on the company and its type of business.
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Kim, Yun-Hee. “IntelliCorp Raises $5M In Equity Financing.” Wall Street Journal Interactive.(March 12, 2001).
Lazo, Shirley A. “Bush’s Tax Plan: Dividend Booster.” Wall Street Journal Interactive.(March 12, 2001).
Needles, Anderson, and Caldwell. Principles of Accounting. Princeton, NJ: Houghton Mifflin, 1996 (p.1162).
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