Planning for the Potential of New Corporate Taxes

    

Over the past 48 hours I have received a significant number of requests to comment on the results of the US election from a Business Acumen perspective. As of this writing, the election is still not resolved, and it maytax-planning-business-acumen not be for days or weeks ahead. That being said, the requests are still important and it’s my pleasure to share some business acumen insights on what to plan for and how to adjust your strategic thinking and forecasting for 2021 and beyond.

Assuming the current situation of a Biden administration stays in place, it is inevitable that there will be a battle with congress and in business boardrooms over increased corporate taxes. Most large organizations are against raising the corporate tax rate which opens up a philosophical debate about what happens with the tax dollars. Supply-side economists and many executives believe that lower tax rates enable big businesses to take the money they would have spent on taxes and reinvest it into the business in the form of more jobs, more R&D, more sales, more marketing, etc. The other side of the argument challenges the notion that big business will do anything positive with that extra cash and in fact will use it to make the rich richer by keeping it and paying out bonuses and buying back stock. They want to tax the rich and give to the less fortunate.

Both arguments have valid points and balances must be found, but the most recent data shows that when you cut the tax rates the economy booms. Before the pandemic burst the bubble last March, unemployment had hit an all-time low and the combination of low interest rates and the ability to borrow more cash created a situation of unprecedented prosperity for workers, businesses, and government agencies alike. But that prosperity was driven on the back of increased Federal debt.

The second most significant outcome of this election will be that the Republicans will still control the Senate. The significance of this outcome is that the chances for major tax changes to businesses are almost zero. Business leaders can plan for at least the next two years to be at the same tax rates which should ease concerns for a slow down in a post-COVID recovery economy.

Your longer-term planning, however, should include significant tax increases because at some point within the next three years as the large Federal deficit will have to be addressed. The Democratic controlled White House and House of Representatives will want to increase taxes to both spend for more programs and to reduce the debt. That is going to cause significant difficulties for the economy and will in my opinion will heavily influence the 2024 election which will be quite unique. The day Joe Biden is sworn in, he will be a lame duck first term President because of his age. Biden and the democrats will start grooming Kamala Harris to ascend to the Presidency but the economy in 2023 into 2024 will be struggling in most scenarios.

The implications of all this planning has several impacts on what business leaders should be doing in the first six months of 2021. Knowing that taxes are going to go up, knowing that interest rates are going to go up, and knowing that the economy will be sluggish at best going into the 2024 elections, you should plan for growth and sustainability now. Invest in your teams, invest in capacity, create the operational excellence that will give you the ability to ride out the tough times that are coming in the next 3-5 years.

The difference between the current COVID-induced recession and the recession to come after taxes are raised in a few years to address the deficit will be different than recessions of the past because of technology. One of the lasting impacts of the pandemic is the disruption of how we work, learn, and play. The surge of urbanization – where young move into large cities – is going to reverse and the notion of “work anywhere” is going to completely change where people live. Suddenly open spaces, states with lower income taxes, and warm weather will become even more attractive and desirable. Decreases in disposable income due to higher federal taxes will be offset by lower costs of living, less travel costs, and less expenses on things like clothing and grooming.

In summary, change is inevitable whether or not things are good or bad. If there’s one constant, predictable thing in the world of business it is that things will change and the best leaders in the world are thinking about and planning now to take any and all advantages for the future. As we all sort out the mess of the election, those companies who wait and don’t take big bold steps now will be limited in terms of options when things get really tough.

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Robert Brodo

About The Author

Robert Brodo is co-founder of Advantexe. He has more than 20 years of training and business simulation experience.