Moody’s: Tax bill will benefit most U.S. companies

The tax bill the United States Congress just passed will benefit many U.S. companies, according to a new report from Moody’s Investors Service.

The reform will see corporate cash flow boosted thanks to a corporate tax cut from 35 percent to 21 percent.

“In the corporate sector, the lower rate and full deductibility of capital spending are credit positive and largely outweigh the cost of the limitation on interest deductibility for all but a handful of investment-grade U.S. companies,” the report reads, adding that limits on interest deductibility could leave highly leveraged companies worse off.

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The banking sector will see a benefit from the net reduction in lenders’ tax liabilities and thereby profit improvements, according to Moody’s. This will benefit shareholders, asset managers and insurers.

“Write-downs in the value of deferred tax assets could have some modest impact on banks’ reported capital ratios,” the report reads. “The tax bill is net positive for most asset-management firms, with potentially greater benefit for those with foreign earnings. It is also a net credit positive for insurers, but impacts are company-specific.”

When it comes to structured finance, Moody’s reports that generally lower taxes for U.S. corporations and individuals will support debt service for groups and obligors.

Modest Economic Growth

The U.S. economy is expected to grow 2 percent to 2.5 percent 2018 through 2019, according to the report.

“These forecasts incorporate our view that the contribution of the tax cuts to aggregate economic growth will be modest, in the range of one-tenth to two-tenths of a percent. The marginally stronger growth will be driven mainly by somewhat higher household consumption resulting from individual tax cuts,” the report reads.

However, researchers don’t believe that corporate tax cuts will significantly increase business investment spending, and tax changes will have a modest effect on stock prices.

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Moody’s believes the impact of tax cuts on economic growth will be modest for several reasons:

  • Although corporate tax cuts could raise business investment on the margin, nonfinancial companies that have held back investment in the low-interest-rate environment might choose to either pay down debt or engage in share buybacks.
  • Income tax cuts will be proportionally larger for higher-income households, which have a relatively lower propensity to spend.
  • Government spending cuts undertaken to pay for the tax cuts could lower growth.

“We expect that with above-trend growth and full employment, in part related to the tax cuts, inflation measures will strengthen over time, eventually stabilizing around the U.S. Federal Reserve’s inflation target of 2 percent,” according to the report.

That momentum could reinforce the Fed’s confidence to raise rates two to three times in 2018. “The higher debt trajectory resulting from any unfunded element of the tax cuts is likely to push interest rates up somewhat in the medium term,” according to Moody’s.