How Obama's Balanced "Tax-Loophole" Closing Will Crush S&P Earnings

Tyler Durden's picture

Following today's sequester-delay-seeking, tax-hiking, close-the-loophole speech by the President, it would appear that fiscal policy debates will be balanced a little more to raising effective rates on corporates (as opposed to the 'statutory' rate so many discuss). The US has the second highest global 'statutory' tax rate but less than 10% of S&P 500 firms have paid this rate over the last decade. Somewhat shockingly, since 1975, taxes have had the largest cumulative impact on S&P 500 ROE as effective rates fell from 44% to 30%. They estimate each percentage point rise in effective tax rate would lower S&P 500 ROE by 22 bp and EPS by $1.50, all else equal. Closing all the loopholes would smash year-end 2013 expectations from Goldman's 1575 to around 1300 with Staples and Tech the hardest hit. With the 'market' the only policy tool left, it would seem not even the Fed could monetarily save us from this fiscally fubar action. 


Via Goldman Sachs,

Political dialogue in Washington, D.C. has turned squarely to the nation’s fiscal health. The temporary resolution of the ‘fiscal cliff’ focused mainly on raising revenues through changes to personal tax rates, but delayed decision-making deadlines on the sequester and the long-term path of Federal spending.

Corporate tax rates will likely receive scrutiny as the debate continues. Corporate taxes contributed 8% of 2012 federal revenues. A recent Congressional Budget Office report suggested that policy adjustments such as eliminating foreign tax deferrals could increase US tax revenues by as much as $100 billion over the next decade.

President Obama and Democratic leaders continue to focus on raising revenues. Corporate tax rates represent a logical next step following successful year-end negotiations that raised personal taxes. In his January 5th radio address, President Obama maintained that “spending cuts must be balanced with more reforms to our tax code. The wealthiest individuals and the biggest corporations shouldn’t be able to take advantage of loopholes and deductions that aren’t available to most Americans.”

The debate will be fierce as Republican leaders emphasize spending reductions. In an attempt to focus on cutting mandatory government spending through entitlement reform, Senate Republican Leader Mitch McConnell recently summarized the right’s view, stating “The tax issue is finished, over, completed. That's behind us. Now the question is, what are we going to do about the biggest problem confronting our country and our future? And that's our spending addiction. It's time to confront it.”

The United States has the second highest statutory corporate income tax rate among OECD countries, at 39%. This rate combines the 35% federal rate with a weighted average of state corporate marginal income tax rates. Among developed countries, only Japan has a higher statutory combined rate (40%). Furthermore, although most developed countries primarily employ a territorial system, levying corporate taxes on income earned within their borders, US tax policy includes all income of domestically-incorporated multinational companies, regardless of origin, while allowing deferrals and tax credits in certain cases.

However, statutory rates do not reflect the effective taxes paid by large-cap US firms. For the last 45 years, the median S&P 500 firm has paid an effective tax rate averaging more than 5 percentage points below the statutory rate. Despite statutory rates hovering near 39% for the last 25 years, effective tax rates have been gradually decreasing (see Exhibit 2). At 30%, the current S&P 500 median effective tax rate is almost 10 percentage points below the statutory level, and close to the global statutory average. The aggregate tax rate has averaged 33% over the past 10 years and was 26% over the past four quarters.

The distribution of S&P 500 company median tax rates over the last 10 years indicates that fewer than 10% of firms pay at least the statutory rate. Exhibit 3 shows the median ratio of taxes paid to pre-tax income over the last 10 years. The average firm paid an effective rate of 31% with a standard deviation of 7 percentage points. The median tax rate over the past three and five years equals 31% and 30%, respectively.

The tax preferences that create the gap between effective and statutory rates will likely receive scrutiny from policymakers as they attempt to reform the tax code. By closing the gap between effective and mandated tax rates, the government could raise revenues while lowering the statutory rate, thus presenting the change as a tax cut. Democratic leaders, including President Obama and Minority Leader Pelosi, have specifically mentioned targeting corporate tax strategies that create this gap.

Changes to tax rates could have meaningful implications for corporate profitability. Since 1975, tax rates have had the largest cumulative contribution of the five DuPont factors to S&P 500 index ROE (ex-Financials). The majority of this 551 bp contribution was generated in the 1980s when President Reagan cut statutory rates from 50% to 39%. In the last decade, taxes have had a positive but much smaller impact, contributing 118 bps of the 534 bp ROE expansion through 3Q 2012.

We estimate each percentage point rise in aggregate effective tax rates would lower S&P 500 ROE by 22 bp and EPS by $1.50, all else equal. Exhibit 5 shows the sensitivity of index ROE and our 2014 EPS forecast to tax rate changes. For example, a 4 percentage point rise in aggregate tax rate from the trailing four-quarter rate of 26% to 30% would lower current S&P 500 ROE from 16.1% to 15.2% and would reduce our 2014 forecast EPS from $114 to $107. Applying a constant P/E multiple, our year-end 2013 valuation forecast would decline by roughly 6% to 1483.

Effective tax rates vary widely across sectors. Exhibits 6 and 7 show the distribution of tax rates for S&P 500 sectors during the past decade and the potential impact of changes in effective tax rates to sector ROE, respectively. Among other reasons, tax rates and ROE sensitivity vary due to differences in geographic revenue exposure, capital structure, and the applicability of various tax preferences. Details of any corporate tax code changes, not just the size of the change, will determine the specific profitability impact on each sector and company. For example, Information Technology and Health Care firms paid the lowest median tax rates over the past decade, despite having vastly different foreign revenue exposure (59% and 22% of 2011 sales, respectively).

Energy pays the highest effective tax rate among S&P 500 sectors despite being frequently cited as an example of corporate tax preferences. House Minority Leader Nancy Pelosi recently highlighted ending “special subsidies for big oil” as an opportunity for increased government revenues. However, in part due to excise taxes on the sale of oil products, the Energy sector has paid the highest median tax rate during the last 10 years. In the first three quarters of 2012 the sector had the largest aggregate dollar amount of taxes and highest tax rate ($67 billion on $166 billion of pre-tax income, or 40% tax rate).


Source: Goldman Sachs

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flacon's picture

Obama! What a fucking asshole. All of them in this government. These whipped-up-into-a-frenzy politicians and bankers can come on over and I'll pour molten silver down their throat!


Here take a listen to James Dines, master of psychology of markets:



Buckaroo Banzai's picture

"Loophole" is one of those Progressive-Marxist code words for "fuck you, I'm taking your ___________, eat shit and die"

Fill in the blank with anything you hold dear: money, guns, rights, children, etc.

smlbizman's picture

no matter where they pretend to take it always comes from us......

James-Morrison's picture

Coming soon to a URL recorded in your browser via NSA, we will have a "blood pressure O-meter" as part of Obamacare. (Where each post comes with a government-rated value used to determine your insurance premium).  

However, I refuse to get excited and raise my blood pressure based on the morons running this country.  

I have tuned out.

(off the grid)...... Phhht!

James-Morrison's picture

Tough crowd..

Let's say I made $7 Million in 2002 and after paying taxes I net 3 million.

How do I get the 3 million out of the US?

Any ideas??


James-Morrison's picture

This is why
Why we fight
Why we lie awake
This is why
This is why we fight
When we die
We will die with our arms unbound
And this is why
This is why we fight

So come to me
Come to me now
Lay your arms around me
And this is why
This is why
We fight
Come hell
Come hell
Come hell
Come hell

legal eagle's picture

There is nothing illegal about transfering your wealth out of the US.   You have to declare it, and if the assets end up in an account you have to file an FBAR each year.   If it ends up in an allocated gold account you have to declare it on Form 8938.   Again, nothing illegal about moving assets abroad.   If the funds buy physical gold and you hold it in a safe deposit box, it is not an account and you need not file an FBAR, and it is not a managed allocated gold account, so you need not report it on From 8938.

So, you can hold physical gold offshore in a safe deposit box without any further annual disclosures, until you sell it and make a profit which, of course, is reportable income if you hold a good ol US Passport.   FYI, the lines at the embassies to expatriate continue to grow.  It is not the torture, the drones, the lack of the 4th amendment, or the 2nd, or even the NSA reading every e-mail and storing every phone call that is driving this up tick in expatriation, it is simple money, people with money see the writing on the wall - they want out of the US as taxes continue to climb.  

A person who is not taxable on his worldwide income, like most Europeans including UK, can keep their assets in Cayman, earn tax-free, until they remit the funds back into the UK at which time it becomes taxable.  It is almost like having a exempt retirement plan at all times, without all of the restrictions.  Not for us with the US passport though, our earnings everywhere are taxable - we are debt servants.

Dane17's picture

Yeah hearing a progressive use the word loophole is like hearing a business partner bring up "goodwill". Either way you know you are about to get fucked.

philipat's picture

Dublin is a nice City for re-location of Corporate HQ, and just a private jet hop away from NYC.

US subsidiary? No problem. Transfer price all the raw materials, management services plus Royalty, Trademark and other IP fees from The Caymans.

tpgaynor's picture

Brilliant!!! That's business it is....with a Black and Tan to boot!!


Dewey Cheatum Howe's picture

If the article is correct, I think we will be getting a glimpse of who the puppet and who the puppet master is when this plays out. That assumes moneybags Bernanke doesn't have any more soap for his bubbles. Maybe we should just call him Bubble Ben or Daddy Whorebucks.

stocktivity's picture

It's all Bullshit!!!!

fuu's picture

Austerity for you...

LongSoupLine's picture


What the ever living fuck is that?

nmewn's picture

And...corporations will pass any rise



Chuck Walla's picture

And...corporations will pass any rise

Exactly, corporations do not pay taxes. They accumulate customer's money for the treasury.


1984's picture


When corporations pay taxes, the tax money comes from the sheeple that buy their shit.  When corporations don't pay taxes, the money comes from everyone, whether they buy their shit or not.

max2205's picture

Just get ge goog appl ect to 30% and I'd be amazed

Orly's picture

Wonderful information.

Five years ago, we could have never had access to analysis from none other than Goldman-Sachs, unless we paid through the nose, of course.

Thanks, ZeroHedge!


tom a taxpayer's picture

Tyler - So you're telling me I have a chance to make millions with S&P stocks? YEEEAAAH!

Freddie's picture

This is all very bullish!

2,000 more points on the mean Dow Jones Index! 

Winning!  Hope & Change with Skeet man.  

PeeramidIdeologies's picture

At some point along this path, some need to stop an say, " Hey, making over a million bucks a year is pointless. I should stop paying myself this retardedly exorbitant wage and instead invest it in my surroundings". Otherwise this pointless game of stacking zero's is going to drag this whole planet into a fukhole we might never get out of....

Bill Gates gets it.

FreedomCostsaBuck-o-Five's picture

Ha!! "The debate will be fierce" in congress. Nooooo.... The Republican party has been neutered and their spines have been ripped out so all we can expect is a placating whimper. They won't actually do jack squat.

FreedomCostsaBuck-o-Five's picture

Ha!! "The debate will be fierce" in congress. Nooooo.... The Republican party has been neutered and their spines have been ripped out so all we can expect is a placating whimper. They won't actually do jack squat.

yogibear's picture

In the last 4 years Obama buried any sense of fiscal responsibility.

The next 4 years Obama will bury the US.

WTF_247's picture

Obama has an easy solution here but there is no chance he will take it.


Completely rewrite the corporate tax code to allow for full deduction of non executive salaries from taxable income.  Remove or limit most of the existing rules for deductions that are gimmick/garbage based (most of them) -  Basically remove most of the bullshit accounting deductions that are non cash and not relevant.  Moving numbers from one side to another of the balance sheet does not create income.  Sales and revenue do.

 If salaries of non-executives is below 25% of net income you pay a penalty tax rate of 50% of the excess.  Anything above that is taxed at a flat rate of 15%.  I would also go so far as to regulate the executive total pay (including options) vs average employee salary ratio.  Anything above a certain threshold increases the tax rate paid.

For those companies operating at a loss for the year, non cash expenses, goodwill and other gimmicks cannot be used to reduce income to a loss.  For those actually at a loss, the year following the loss the rules for employee payment vs taxes are removed for that year only.

This is not perfect but would go a long way to solving the "CEO makes 100mil" while the engineers that make the company work make 60k problem and then are shit-canned when the manager gets a bonus by "cutting costs".

gwar5's picture

DroneDjango unchained. Just getting warmed for next more years. 


Why does DroneDjango think taking money out of the private sector is supposed to help when he already can't create deficits fast enough? And, if the economy is so great why is he searching the sofa cushions for loose change? 

Communists love to run off anti-communists through taxation and inflation, make them abdicate their property. Honey badger don't care about jobs.



ghostfaceinvestah's picture

None of this crap will matter when Bernanke forgives the US debt he is holding.  Don't think it won't happen.

MyBrothersKeeper's picture

Cost push inflation will ensue for those whose products/services allow for enough price elasticity to do so. The rest will resort to layoffs etc. The tech sector and others will suffer though as price competition is fierce and by nature they are already highly automated and relatively lean.  The sector that has the most potential to become more "lean" is the government sector but they will only benefit as more revenue almost always equals most wasteful/misallocated they have no incentive to be lean or use resources wisely. All of which will certainly not lead to a more healthy economy.  That's why I say I see no chance of a deficit less than 1 T a year.

Go Tribe's picture

Enough to push the bond market over the precipice perhaps. How much more shit can the debt markets take?

j0nx's picture

Whatever. Big corps don't pay taxes. Taxes are for mom and pops and the middle class. If you really think that any large corps pay taxes then I have a bridge to sell you.

RMolineaux's picture

Quite right, J0nx.   This caused me to be puzzled by Tyler's introductory paragraph.  He gives the impression of being in favor of loopholes.  Say it isn't so, Tyler!