Tax Cuts: Implications for Startups

President-elect Trump has proposed to make a bold set of tax cuts when he takes office.

I believe his proposals are our best chance to escape this extremely low growth period.

For years, the economy has basically been treading water. Officially, it’s growing at a snail-like 2%. But if you factor in real inflation costs, that “growth” is basically wiped out.

We need to spend money smarter, and the best way to do that is to let individuals and companies allocate it.

Under Trump’s plan, individual rates are expected to drop for most tax brackets.

Death tax? Alternative minimum tax? Gone, and good riddance.

According to anti-tax guru Grover Norquist, Trump will also repeal the roughly 20 tax increases that fund Obamacare.

As you probably know, Mr. Trump has also proposed a cut in corporate tax rates from the current 35% (one of the highest in the world) to a more reasonable 15% or 20%.

We don’t know how successful the new president will be in making these changes, but
Wall Street seems to have priced in at least a 10% cut in corporate rates. With the GOP in control of Congress, they should at least be able to do that much.

In the stock market, it’s relatively easy to understand the impact of Trump’s proposed cut in corporate tax rates.

According to S&P’s Mike Thompson, every 1% drop in taxes will boost earnings around 1% for the S&P 500 annually.

However, this “roughly 1%” rule doesn’t tell the full story.

When companies get to keep more earnings, all sorts of good things happen. Firms can raise salaries. Hike their dividends. Hire up. Or invest more in their businesses.

The benefits of tax cuts compound over time and should also encourage reduction in federal government waste.

Reducing taxes is a far more efficient way to boost the economy than government spending. Governments simply cannot allocate capital efficiently.

This is why we’ve seen stocks perform well after the surprising election results.

However, U.S. stocks as a whole are still not cheap. The Shiller Price/Earnings ratio is currently 28, versus a long-term average of 16.

There are attractive opportunities to be found in stocks, sure. But most of the tax cut has already been priced into public markets.

Lower tax rates should have an even better effect on the startup investment landscape, as I will explain.

Overseas Cash Comes Home

U.S. corporations have more than $2 trillion (untaxed) stashed outside the country.

That is a monumental sum. Two thousand billion. For comparison, the entire U.S. federal government budget for 2016 was around $3.5 trillion.

Just five top tech companies (Microsoft, Google, Apple, Cisco and Oracle) reported they had $430 billion parked overseas at the end of 2014. That’s 90% of their cash, and the amount has grown since.

If the president-elect succeeds, much of that $2 trillion is expected to come home. Companies would be foolish not to do so while taxes are low…

Cash-rich tech corporations will be looking to put that newly available money to good use. One of the best ways to do that is to acquire young high-growth companies (startups!).

It could be the largest-ever infusion of capital into the U.S., and I suspect it will set off an unprecedented acquisition boom.

This is extremely bullish for startup investors.

Those who invest in young companies today stand to reap the rewards of this unique set of circumstances in just a few years’ time.

It’s yet another reason I believe 2017 is a great time to invest early and well.

Good investing,

Adam Sharp
Founder, Early Investing