Tax Reform for Metal Deformers
Last Dec. 22, 2017, the President signed the Tax Cuts and Jobs Act into law. This was a controversial bill in that many think it will add too much to the U.S. deficit and that, in the long run, it will favor the wealthiest taxpayers at the expense of the mid-range and lower-end ones.
In Congress, the law passed the Senate along strict party lines by a vote of 51 to 48, with Republican Senator McCain of Arizona not voting for health reasons. In the House, the law passed with a vote of 227 to 203. It is noteworthy that 12 Republicans in the House voted against the law, most coming from states particularly affected by cuts to the state and local tax (SALT) deductions. No Democrat in either Congressional chamber voted for the law.
It is not our intent to debate the political dynamics that accompanied this bill through Congress and into law. Opposition to the bill was significant and based itself on the presumptions that the law would add to the nation’s deficit and that its overall terms favored the wealthiest taxpayers at the expense of those less well-off. In contrast, the bill’s proponents favored the significant reduction in corporate tax rates, the temporary reduction of personal income taxes to average taxpayers, more lenient estate taxes and the ending of the individual mandate, which was part of the Obama administration’s Affordable Care Act that called for tax penalties for individuals who did not buy health insurance under the law.
It would be an understatement to say that the business sector generally got a great boost from the passage of this law. Our Washington columnist, Laurin Baker, in his typically clear and concise way, lists the major bullet points of this legislation on page 12. The first bullet on his list was the permanent reduction in the corporate tax rate. The newly enacted law states that in 2018 the new corporate tax rate will be 21% – significantly lower than the previous top corporate rate of 35%. Analysts say the 35% rate was the highest among the world’s wealthier, developed countries.
The tax-rate reduction does two things. First, it will put a lot more cash in the hands of corporate executives. Historically, the success of this bill will be evaluated based on what they do with this cash windfall. Will they invest it in new technologies, products and jobs, or will they just buy back their own stock or keep the cash in reserves? Second, the lower tax rates will remove the incentives toward corporate inversion, a tax strategy whereby a U.S. company might move overseas to relieve the tax burden on its income, especially on income derived from foreign sources.
Of course, this “boost” to corporate American business must eventually be financed somehow. If corporate tax savings are reinvested into the business and the economy, then the ensuing economic growth may economically justify the reduction in the tax rate. If not, then the shortfall will add to the nation’s deficit, and the liability will be paid for by our children and grandchildren. As of this writing, those who analyze the economic effects of legislation generally, though not unanimously, agree that the new tax law will not pay for itself.
It is realized that we have just scratched the surface of a complex and multifaceted tax law. We are very interested in hearing from forging executives about the Tax Cuts and Jobs Act and how/if they will spend some of their tax savings.