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Trump and tech have had a varied relationship. From the obvious love of twitter to the accusations of bias against him that the President has aimed at much of the technology industry, there have been love-ins and fall-outs aplenty since Trump took office. For now however, it looks like things may be taking a turn for the better in the on-again, off-again relationship between tech and the GOP with the long awaited tax reform plan set to take centre stage with both a short term and long term gain on the cards.
As with most things though, the devil is in the detail. What the administration has published is an extremely vague “framework” (here) for tax reform which makes a lot of the noises that corporate America likes but which really provides almost no substantive inkling of what will eventually come out of the proposed reform other than some high level objectives.
The Short Game
As I mentioned in my end of year wrap up/forward guidance piece in December (here), the US tech industry currently holds a huge amount of cash offshore. A peculiarity of the current US tax code which means that the government doesn’t get a penny of that in tax revenue until those companies decide to bring the money back home. However given the relatively punitive corporation tax rate in the US, of course those companies tend to keep all that lovely money outside of the US and sitting in low tax jurisdictions doing very little other than accumulating.
So in the short term, there is a lot of desire both in industry and government to do something about this to allow for the money to be brought back home so that it can both be put to good use investing in new jobs, plants and products as well as fill up the government coffers at the Treasury a bit. The framework document uses a throwaway line to address this point, stating:
To transition to this new system, the framework treats foreign earnings that have accumulated overseas under the old system as repatriated.
While going on to explain that accumulated foreign earnings which are held in illiquid assets (think factories etc rather than cash, stocks, bonds and other easily transferable securities) will be taxed at a lower rate.
So it’s clear that the legislative product of the framework document needs to do something to address the huge cash piles US corporations have sitting abroad and it is of course likely that given the other blockbuster headline for industry in the framework, this will not be levied at anywhere near existing corporation tax rates. The over $2.5tn that US companies hold overseas is one step closer to being able to be brought home cheaply.
The Long Game
Here we get to the big change. Corporation tax is expected to be brought down to 20% from the current (eye-watering) rate of 35%. Much of the rest of the world is already significantly below the 35% rate currently charged in the US. The objective here is obviously to spur economic activity and make sure that American corporations have no incentive to consider relocating to other countries as well as spur more job creating activities in the medium to long term.
The goal here is to make American corporations more competitive with their international counterparts who typically pay lower rates. Big tech doesn’t have a huge number of international competitors, particularly when it gets to a lot of the companies we’re all familiar with: Intel, AMD, NVIDIA, Apple, Google, Microsoft and others are generally leaders in their chosen fields so this will effectively act as a windfall to their US operations, allowing for further investment.
Small and medium sized businesses also effectively get a reduction since they would be capped under the new plans at 25% where they are currently effectively taxed at the rate of their owners, also something which may be useful to technology startups.
It’s clear that this plan would do a lot for the American tech industry as it stands today, even without the huge amount of detail which is currently missing. The difficulty however is that despite Republican control of both chambers of Congress as well as the White House, legislative victories have been hard to come by since the President took office.
The difficulty is that the GOP has senators and congressional representatives from fairly disparate political leanings and it has proven difficult getting enough of them to agree across both chambers to actually pass any major legislation with the obvious example being the (numerous) failed attempts to repeal and replace Obamacare. The $1tn infrastructure plan is also talked about but seemingly nowhere near reality, although this may be something that Congress tries to push forward with on its own given the toxicity to the Democrat image working with Trump directly would be.
So that makes the situation a tricky one. Tax reform is wanted by both parties, but any hint that the rich will benefit, or that the long term benefits of the reform programme will disproportionately accrue to the rich means it is unlikely to win bipartisan support. As such, the plan is likely to need total GOP support in congress to get through, something which hasn’t been too easy to come by recently. Of course this says nothing of the affordability of the plan which is where the real amusement comes.
The Trump Tax Plan: AKA A Laff a Minute
Some of you may have heard of the concept of the Laffer Curve. An economic theory which has been occasionally borne out historically but which is very difficult to pin down. The theory effectively runs thus:
At both 0% and 100% tax rates, the effective amount of revenue collected by the government in tax receipts is zero since at 0% the government taxes nothing and at 100%, there is no incentive to work since you don’t get to keep any of the money. Therefore between 0 and 100, tax receipts will obviously be more than zero, with the amount gained by government increasing from zero before at some point, reducing again as it approaches 100.
As such, it is theoretically possible to reduce taxes and the result to be an increase in the tax receipts that the government receives. This appears to be the rough principle that the plan is relying on given the noises which have been made about how the plan should spur economic activity enough to cover the cost of the tax cuts it intends to provide. This however is quite unlikely and given Republican attacks on Democrat fiscal responsibility credentials over the 8 years under Obama, one wonders at what point the argument over debt ceilings and government borrowing will rear its head again. If one thing is certain in this framework, it's that in its current form, government borrowing will need to increase in the short to medium term.
For now, much of the American tech industry waits to see if it can bring its money home. If and when that time comes, as mentioned previously, look towards a possible increase in M&A activity as companies look to splurge the cash bonanza in the constant search for greater profits and shareholder returns. That much said, there are a lot of hurdles before that can happen with many details yet to be resolved. We'll be following the story closely.