Tax reform is on every analyst’s mind right now. Changes in the corporate tax rate are a significant development. Many analysts are revising their earnings models to reflect the lower rates. In many cases, this will result in higher earnings per share.
But, the changes to the tax rules will have effects beyond the rate that companies pay. The reforms will also change business plans. Some companies made headlines within an hour of the bill becoming law by announcing bonuses for all workers.
Other companies announced new wage policies. There is little doubt that more companies are preparing plans in private. One area that is likely to see changes is capital spending.Capital spending involves the purchase of large items or new buildings. The tax code changes the facts behind many decisions.
For example, in the past it might have been profitable for a company to build a factory overseas. Lower wages would offset the higher shipping costs and higher taxes. But, now, with lower taxes, the math might change. It could be best to pay higher wages to save shipping costs with low taxes.