The Trump administration was quick to deliver on its promise to slash America’s corporate tax rate from 35% to 21% and prolong the economic expansion. Yet US treasury and finance professionals appear keener to sit on their increased cash holdings for now, rather than harness them for hiring and investment.
It was a central plank of his ‘America First’ trade policy, so when President Trump signed the Tax Cuts and Jobs Act of 2017 into law last December it marked a high point from his turbulent first year of office. The tax reform sliced the US corporate rate from 35% – the highest of any OECD country – to 21% and included a provision requiring companies to repatriate billions of dollars in overseas earnings. Many are reported to be “awash with cash”.
The President’s largesse comes at the expense of swelling an already heavy national debt burden. Midway through 2018 the US deficit stood at US$607.1bn, up 16.1% on a year ago. The non-partisan Congressional Budget Office (CBO) expects figures of US$793bn and 19.1% respectively for the entire budget year – equal to 78% of GDP – in part reflecting Trump’s US$1.5trn in tax cuts plus the US$1.3trn spending bill enacted by Congress in March.
By 2048 that percentage could have doubled, to a record 152% of GDP. While the new tax law permanently reduces the corporate tax rate, a further US$1.1trn in cuts for individuals and businesses – currently structured as “pass-throughs” and due to expire after 2025 – could also be extended.
Is the gain worth the pain in galvanising US job creation and investment? As many note, America’s jobless rate has steadily declined since the 2007-09 recession. Currently standing at an 18-year low at 4.0%, the scope for further reduction is debateable.
The US Chamber of Commerce is optimistic though “It will be years before we know the actual impact of tax reform on the deficit,” says Caroline Harris, Vice President for tax policy and economic development and chief tax policy counsel. “In the short run, we already are seeing economic benefits, such as worker bonuses and reduced consumer energy costs.
“Further, as companies continue to work to implement business changes resulting from tax reform, we expect to continue to see positive economic outcomes – increased capital spending and wage growth.”
Yet a recent study researched by the Association for Financial Professionals (AFP) and underwritten by State Street Global Advisors suggests US corporate treasury and finance executives are in no hurry to spend the tax windfall.
The AFP surveyed nearly 640 corporate treasury and finance professionals in April, the majority of from smaller businesses with annual revenues of under US$1bn, of which 27% were publicly held and the remainder privately held.
The survey found that 40% of respondents anticipate no change in spending levels at their company in the wake of corporate tax reform. Just over one in four (26%) said they plan to pay down debt and 24% intend to repatriate foreign cash or had already repatriated these funds. Of those planning to repatriate funds held abroad, 27% had already done so.
Caution also still governs their investment policies. Of the companies surveyed, most still allocate a major chunk of short-term investment balances—an average of 75% —to safe and liquid investment vehicles like bank deposits, money market funds (MMFs) and Treasury securities. The AFP reports that the typical organisation currently maintains 49% of its short-term investment portfolio in bank deposits.
Nor does major change seem imminent: 59% of respondents don’t expect their organisation’s short-term investments portfolio to alter, and only 11% project a shift in the mix.
AFP President and CEO Jim Kaitz commented: “While treasury and finance professionals welcomed corporate tax reform, they continue to be strategic and cautious and are choosing to wait for the right opportunity to spend their tax cut savings.”
“Current markets have been causing concerns for US economic growth, yet cash balances remain high, acting as a buffer against these market uncertainties,” added Yeng Butler, State Street Global Advisors’ Senior Managing Director and Global Head of Cash Business. “We're seeing a shift in investment professionals using cash management as part of a broader corporate strategy from historically being an operational afterthought.”
A US$2.5trn flow
Little in the findings evidences major economic benefit, yet some media outlets insist the tax cuts are already proving a major success. “In every state, businesses have passed the benefits on to their employees,” reported Fox News this week.
“More than 650 companies are using the cuts for employee bonuses, pay increases, charitable contributions and new investments. For example, [non-profit health insurer] Premara Blue Cross announced it is dedicating US$40m to community reinvestment… Inland National Bank (INB) has shared its tax savings with employees by raising their base pay to US$15 an hour.”
However, such local examples are eclipsed by the sizeable tax savings enjoyed by the biggest US corporations, which are diverted primarily towards rewarding investors via increased dividends and share buybacks. These activities, coupled with merger and acquisition activity, are termed as “flow” by strategists at UBS, who expect them to collectively total more than US$2.5trn this year – US$500bn-plus from dividend issuance; US$700bn-US$800bn from buybacks and US$1.3trn from M&A activity.
Apple alone accounts for US$100bn of stock buybacks, or a 40% slice of the US$252bn in overseas profits that repatriated to the US due to the tax reform.
While smaller US businesses may in time put their tax windfall to work, the latest manifestation of ‘America First’ does little to dispel their caution. An escalating trade war with the US’s main trading partners and the tit-for-tat tariffs imposed on imports and exports is adding to uncertainty – and may persuade them to hold on longer to their cash pile.