Impact of new tax reform on the manufacturing sector

taxes.jpg

 

By Chelsea Virga

Benjamin Franklin said there were only two things certain in life: death and taxes.  However, with such massive alterations to tax policy this year, the ladder has become increasingly unknown.

The dense complexities of tax code can make the details daunting to comprehend, but there is definitely a few core components worth taking notice of.

  • The legislation is foremost calling for a cut in the corporate tax rate from 35% to 21%; this is the greatest one-time corporate rate reduction in all of American history.
  • Another key element is a transition into a “territorial” tax system where US companies will be not taxed on foreign earnings abroad; this is coupled with a one-time repatriation tax for assets and cash held by U.S. firms overseas. Such an adjustment is being made with the intent to eliminate loopholes corporations currently use to dodge tax payments. 
  • An additional feature is a full and immediate write-off for capital investment in plant assets and equipment for the next five years.
  • Furthermore, another integral aspect is the border adjustability revision that will terminate US firm deductions on imported raw materials or products. US products exported abroad would be exempt from this adjustment.
  •  In sum, the purpose of such revisions are to advantageously position domestic firms against their foreign competition. 

Trump has championed the republican-led tax overhaul, declaring that tax cuts will act as “rocket fuel,’ and will further propel the already heightened economic environment. The new legislation will have a substantial impact on operations in every industry, but will particularly influence those with large capital expenditures and investment in fixed equipment. The manufacturing environment will be vastly affected, as it will be now be more crucial than ever to strategically identify the locations of new plants and designate the sources of raw materials. Firm executives that best research the most efficient ways to locate, produce, and overall operate will reap the most benefits from such legislative adjustments. As manufacturing companies get to spend less of their funds towards their tax obligation, more can be utilized as additional investment in in R&D, capital expenditures, resource development, as well as retained in parts of the business that will further advance operational capabilities.

Despite its recent implementation, firms are already reaping the benefits of the “rocket fuel” and handing some of the monetary value off to its employees. Wal-mart raised salaries salaries from $9 to 11. FedEx has beefed up current employee pension plans. Capital intensive firms like Alaskan Airlines, Jet Blue, Southwest and American are trickling down the billions in savings through $1,000 bonuses for employees. Verizon Communications Inc. is delivering compensation in the form of stock grants valued around $2,600. According to National Association of Manufacturers, a survey gauging insight from the CEOs of 14,0000 manufacturing reveals optimism for the industry is at its highpoints in 20 years.

It is not to say that these changes to fiscal policy will not be accompanied by its risks. The reform may draw advantages to companies locating plant facilities domestically but will also cost them in terms of moving employees, configuring logistics and other possible expenses that accompany US production. It is important to keep in mind that the need for firms to alter supply chain structure could adversely affect companies through increased duties like the VAT tax or expose them to additional vulnerability through changes in foreign exchange rates.

These are some of the reasons the legislation has been opposed by a plethora of critics. Former Treasury Secretary and Obama administration economic advisor Larry Summers expressed that the temporary nature of these rewards don’t align with the permanence of the legislation, which is set to expire in eight years. He has attributed the additional employee compensation to a tightening job market, stating “if the firms really believe this had to do with corporate tax cuts, why aren't they committing to bonuses forever?" Federal Reserve Bank of New York William Dudley has challenged the bill for an alternative reason. The stock market has continued to surge past record highs and unemployment has dropped to a narrow 4.1%. Dudley believes “the economy doesn’t really need” this boost so the legislation is squeezing for growth at a time where there is minimal room for improvement.

The goal for such drastic reform in the tax space is to allow for firms to build up savings that can drive investment. Despite the legislation’s controversial nature, such a positive transformation in the US’s economy is an objective that if achieved successfully would benefit many.