Whether A Cut In Corp Tax Rate Be Beneficial

4338 words - 17 pages

Whether a Cut in Corp Tax Rate be Beneficial

Doesn’t everyone want to keep what he/she has earned? It has always been somewhat tradition for Americans to work hard for their money, only to see some of it squandered away come tax time. Wouldn’t a tax cut, for some, be like a divine, heavenly grace? As the year 2001 unfolds and George W. Bush begins his presidency, income tax rates have, in fact, become a concern. President Bush is pushing for an income tax bill that will reduce the tax brackets from 15%, 28%, 31%, 36%, and 39.6% to a new bracket in 2006 of 10%, 15%, 25%, and 33%. A cut in individual income taxes would benefit most Americans and is well deserved. However, there is no plan to cut the corporate tax rates yet. A hypothetical decline to the corporate tax rates could spawn a number of possibilities for firms and/or even influence the market. However, will a decline in the corporate tax rate positively influence market volume and different firms’ financial activities (i.e. investing, repurchasing, options)? A question of this nature can be answered through analysis of the benefits or detriments obtained by two companies due to the reduction.

There is a basic relationship between the market volume and corporate tax rates. A decrease in the corporate rates would allow companies to pay less on their earnings, leaving them with more Net Income (NI). With this increase in net income, a company can afford to invest in other areas or it allows them to repurchase their stock. By repurchasing stock, the market volume drops by the amount of stock that has been bought back. In addition, buying back shares can affect the overall outcome of the market that day depending on the company engaging in the repurchase. A company with a large stake in the market who buys back a considerable amount of stock will cause a greater fluctuation in the volume. In buying shares, the overall value of the market will rise due to the price increases that occur. If the opposite occurs, the tax rate is increased; some firms may have different decisions to make. Because an increase in the tax rate affects a company’s net income in a negative manner, funds for operations and other activities will become diminished. With the net income being less significant, a firm may need to participate in a form of either debt or equity financing to obtain funds needed to operate. Upon reviewing these companies who use financing in their operations, an analyst may view this company as a candidate for increased riskiness. If the risk is too great and a feeling of uneasiness sets in on Wall Street, investors may begin to sell that firm’s stock, dropping the market price per share and possibly the value of the firm itself. The reasoning? Simple: if the price of the share decreases, then there is a possibility that when the time came for a favorable risk adjustment, investors would be paying a lower price per share than the firm is really worth. The amount of equity that they...

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