When your country is 20 trillion dollars in debt, fixing the budget sort of takes on new meaning. It certainly should create a situation where those that have fiscal responsibility rein supreme. It is odd then, that the critics of the current budget bill that is being discussed in Washington DC are complaining about parts of the bill that use fairly conservative estimates to arrive at their conclusions.
One such criticism points straight at a set of tax incentives that are set to expire during the term that the bill is in force. Since the tax incentives amount to $500 billion dollars, you could estimate that $500 billion dollars extra would be available. Instead, those that support the bill have used conservative accounting estimates to only account for part of that. The net result is that chances are that there will be more available for the US to the bank than critics are allowing for. In a sense, it is an accountant that is working with company assets. They normally choose the lowest possible value for the buildings and physical assets that a company has. That is because that way, there can be no doubt that the assets are worth at least as much as they are said to be worth.
The bill’s methodology certainly makes sense to Senator Mike Crapo, who says that the current budget bill is worthwhile. Of course, being a conservative, Mike Crapo is both fiscally aware and likely to disdain budget efforts that have some smoke and mirror use planned.
Giving Incentive to Corporations:
The largest topic that has been in the current news cycle regarding the budget is the notion that the corporate tax will drop from 35 percent to 20 percent, giving incentive to companies because they can actually keep the money that they make. One question that has been asked regarding this incentive is how important is it for companies to have a tax break cut that large?
For many firms, advancing shareholder value can be accomplished by producing the great product and turning inconsistent product profit margins. The overall profit, which isn’t so much operating profit, but taxable profit isn’t that important because you can theoretically turn zero profit over time and still provide value for customers that causes them to continue to financially back your firm. A look at some of the top stocks in terms of share price shows that to be true. There are some very blue chip companies in the e-commerce world that have been proving their concept and do not always have the same results as NYSE index companies do.
So the question then becomes, since the firms that innovate are more likely to be the ones that eschew a corporate profit for growth, is the incentive still as strong as it would be if all companies were driving by taxable income profit. Looking at it from a tech industry standpoint, some of the companies like Apple and Microsoft and Intel have more cash on hand than most of the countries in the world. At the same time, when they were young and hungry and being relied upon to provide an engine of growth, were they motivated to expand when they made more money? Some people might say that they just ended up stockpiling money and adding shareholder value. Others would point out that they actually did expand massively, in addition, creating the type of jobs and economy that most conservatives are predicting.
The new budget bill is one that has caused a lot of political and economic talk. If executed properly, it might actually end up doing as its proponents say. If it doesn’t, the losers will not be the institutional investor.