- KPB & Co Research
Many pundits have argued that tax cuts are bad for America and many have argued that they are good. Unfortunately, most of the arguments have been presented through political lenses. In our view, the tax cuts are tantamount to an investment by the US government in American businesses. The tax cuts are essentially income that the government gave up so businesses have more capital to play with. Today, a significant portion of the US government's balance sheet is funded by debt that the government issues to the public. The tax revenues forgone could have been used to service this US$ 21 trillion debt, and so the government is essentially using leverage to make the bet. Some investors are of the view that the tax cuts will make it difficult to service the debt in the future. On the other hand, if American businesses use this additional cash to fund capital investments that lead to growth in profitability and cashflows in the future, then the government should be able to recover the money that was invested as tax base would have grown several times over. Many businesses earn a return on equity that is close to 20%, which allows them to compound cash at a faster pace than the government does. There is a big assumption here though. One has to assume that these businesses will use the additional cashflows efficiently, which they may not do. In the end it boils down to whether or not you believe that it is worthwhile to invest in American businesses.