Impact of Potential Tax Rate Changes on Corporate Investment and Growth Plans

The unsteady developments this summer have made it difficult for the executives to estimate the outcome of the corporate tax rate

The US executives are confused and are struggling with the future impact of the corporate tax rate after the upcoming elections. The uncertainty whether the November election will hinder their investment and growth plans. The central variable is unpredictable of how high or low the corporate tax rate might go. 

The unsteady developments this summer have made it difficult for the executives to estimate the outcome of the corporate tax rate. Vice President Kamala Harris has backed boosting the levy from 21% to 28%, echoing the Biden administration’s proposal. While on the other hand, the Republican Presidential nominee, Donald Trump mentioned that he wished for a 20% corporate tax rate and a moving levy of as low as 15%. But it is a given that if their party does not gain power, the rates do not apply. 

A major question of the company’s insiders arises since the election is just three months away is what rate can they model to although the current response is 25%. 

When compared to the past 10 years the higher tax rate can do more damage at present than before. That is because the 2017 21% tax decrease enlarged the tax base, resulting in more income being taxed at a specific threshold. Finance executives are considering the potential effects of a higher levy on companies’ balance sheets, such as cash flow, investment strategy, and if consumer goods prices will rise to offset greater tax obligations, according to CFOs and tax consultants. 

The increased tax bills may slow the growth plans for most companies. 

Taxes are taking up almost a significant portion of Vera Bradely’s cash that is available for investments. Meanwhile the Chief Financial Officer, Michael Schwindle said. “When we’re in a situation where we’re in the mid- to upper 20% on an effective tax rate basis, that has a pretty big impact on our cash flow,” he said. “Obviously higher tax rates means less is available.”  

The company reported a revenue of almost $81 million which was down by 15% from the previous year. It’s famous for their quilted bags and backpacks. The effective tax rate of Vera Bradely’s was 25% for the quarter. 

The main focus of the handbag retailer is expanding the physical and digital footprint while also improving the stores. It aims at opening nine new stores and store outlet locations throughout the year as per the CFO. The increased tax rate is directly proportional to the capital available to bring in such an expansion, he added. 

The higher levy may trickle down to the consumers of most businesses according to Anthony Gruber, the CFO of Mama’s creation. If the prepared-foods manufacturer’s tax rate, which was 24.5% in the quarter ended April 30, rises, the CFO said he will search for ways to offset the additional cost. One approach would be to raise pricing for the company’s meatballs, olives, and other deli foods. 

Despite the increase in tax liability some companies refuse to bring in changes to their investment decisions. 

Though Chipotle would not pull back their investments in the restaurant openings including staff and ingredients for the food chain’s tacos and burritos in case of higher rates as the CFO of the Mexican Grill prefers a lower tax rate.  

The net income of Chipotle restaurants for the last three months that ends on June 30 has risen to 33%. Although the revenue increased to $456 million which is 18% higher than the previous year of $2.97 million. 

While finance executives and other company insiders are examining the consequences of a corporation tax rate adjustment, many are too early to act. 

Conagra Brands is modelling different tax rates, as it does for other changes that affect company finances, according to CFO Dave Marberger. The maker of Hunt’s ketchup, Healthy Choice frozen meals, and Slim Jim meat sticks conducts three- and five-year business forecasts, which, if necessary, will include different tax rates to understand the impact on cash flow, he added.