US Equities Beware: Lower Corporate Tax Rates Do Not Guarantee Higher Profitability
US equities have rallied further since President Trump announced plans for tax reform, including a lower corporate tax rate, on 27 September, while Treasury Secretary Mnuchin has subsequently warned that the market could be vulnerable to a significant correction should Congress fail to secure its passage into law.
Historically, faster economic growth occurred during the periods of higher statutory and effective corporate tax rates compared to those that currently prevail.
Cutting corporate tax rates does not guarantee that companies will automatically enjoy greater operating efficiency, thereby boosting pre-tax profitability, due to the influence of other macroeconomic factors such as labour productivity and pricing power.
The US statutory corporate tax rate at 35% is currently the highest within the G7, but the planned reduction to 20%, last seen in 1939, will take it to the second lowest. Historically, low US corporate tax rates have been associated with greater economic instability.
Lower corporate tax rates are not guaranteed to ensure higher rates of capital formation, a major objective for the Trump Administration, due to lower estimates of long-term potential GDP growth.
Cutting taxes, both corporate and individual, will have adverse implications for federal government finances that could potentially crowd out private sector investment.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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