Corporate America Awaits Tax Cuts: Statistical POV

US President, Donald Trump, has ultimately been successful in delivering his Christmas present, as promised.

As we've all been reading in the news lately, Senate Republicans have passed a sweeping overhaul of the US tax code, placing Donald Trump on the brink of scoring his first major legislative victory.

The Senate approved the $1.5 trillion tax bill, which includes permanent tax breaks for corporations and temporary tax cuts for individuals, by a final vote of 51-48. Once enacted, the legislation will represent the most drastic changes to the US tax code since 1986.

The bill was passed along party lines, with every Senate Republican present voting in its favour and all Democrats voting against it. Arizona Senator John McCain, who is undergoing treatment for brain cancer, was the lone member to be absent for the vote.

These reforms may have a lot of implications, however, the most excited pack, inarguably has to be corporate America, especially the market giants, which may include the like of Apple, Amazon, etc.

In the above chart from Goldman Sachs, Bloomberg, the horizontal yellow line that you see represents the baseline. Anything up above that means that the companies belonging to the highest tax brackets or high tax paying companies (according to a basket of Goldman Sachs) are performing better than the S&P 500.

Now, interestingly when you look at the extreme right-hand side of the chart, you see a significant uptick in the relative performance, crossing the baseline in the past few days. This was because now we were seeing a certainty that this was definitely going to pass. However, it is evident that during the last several months, there was relative underperformance by these companies compared to the S&P 500, thus, lying below the yellow baseline as the companies were in limbo.

When you look back further on, to when Trump got elected for the first time as the US President, there was so much enthusiasm underpinning the outperformance by these companies, who expected the corporate tax reform to pass early on, but the ideas and policies did not materialize in the timeline they expected and then several months later here we are.

Now, let's have a look at some other interesting piece of data. The above chart by Bloomberg gives us insights into a one-month look in terms of what's happened, what impact these tax reforms seem to be having on companies stock prices. Now, the white line here represents the Goldman Sachs high tax index, whereas the blue line is the Goldman Sachs low tax index. So, as it is clearly evident, the low tax index has remained relatively flat or muted over the course of the past month or so.

However, the traction is evident in the high tax index, the white line seems to be inching northwards, higher and higher at least on this chart, but in terms of relative scale for example on November 28th you can see the first bump up, that's when the tax bill left the Senate Budget Committee, then on December second the Senate actually passed its first version of the tax bill. When you look to the right-hand side of the chart, December 15th key GOP holdouts for example Senator Marco, Rubio Florida as well as Senator Susan, Collins of Maine both said that you know what, we are going to support this and we've seen that this has actually sustained that level of confidence and enthusiasm in the stocks ever since.

Finally, let's end the article, by pulling up this last chart by Bloomberg, showcasing the historical corporate tax rates. I put this into focus because, we are seeing the corporate tax rate steadily decline, which has essentially halved over the past decade or so. The red bars here are according to Republican White House's, whereas the blue bars are according to Democrat White House's, but there is no mistaking, these numbers don't lie. The corporate tax rate has fallen from 40% to a staggering low of 20.4% over the last 40 years and looking at the white line, guess what? That's the personal tax rate. The personal tax rate hasn't gone anywhere, remained stagnant up or down around 15.5% where it is right now.

Now the question looking ahead is, What is the real tax rate? What is a real effective tax rate moving ahead once Donald Trump does sign this as he is expected to on January third of the new year?

Leave your thoughts in the comments section.