Content provided by Paul Vaaler of the Carlson School

Ho, ho, ho ‘CCO listeners. I bring you Holiday greetings from the University of Minnesota’s Carlson School of Management and the Law School. We don’t have Christmas trees in either atrium, but if we did then I think you’d find these business and legal news baubles dangling from the branches and attracting your attention:

Bauble #1. The big corporate tax bauble that will bring joy to some (but not necessarily all) of the US corporations liable to that tax. The Republican tax reform and reduction package will become law this week with provisions that take effect as early as January 1, 2018. Which US firms are big winners with a key provision that reduces the statutory top corporate tax rate from 3%6 to 21%? The answer might surprise you. You might think that it’s big and profitable US companies that will benefit substantially. Maybe not. It ends up that many of those companies set aside money to pay income taxes at statutory (high) rates, but then implement various strategies such as paying top executives with stock options (not cash) that result in a much lower effective rate. Facebook is illustrative. In 2015, it set aside money to pay pre-tax income suggesting a 40.5% rate, but with those stock option awards and other tax-reducing strategies, Facebook actually only paid a 10.9% rate: https://www.forbes.com/sites/peterjreilly/2016/11/03/how-much-do-large-corporations-pay-in-income-tax-probably-less-than-you-think/#6ce38ef12399. So who are the winners here? Small and medium-sized firms that can “pass-through” profits through to individuals and avoid the corporate tax altogether. And maybe some medium-sized closely-held firms that can’t take advantage of tax-reducing strategies like a big public firm…Facebook. So this bauble is shiniest for the middle class…of US corporations.

Bauble #2. Here’s a bauble that will bring joy to US-based multinational corporations (MNCs) and their tax lawyers. The same Republican tax bill would take currently untaxed profits of US companies being stored abroad — profits that would normally be taxed at a 35 percent rate upon being brought back to the US — and tax them at new ultra-low rates: 8 percent for profits invested in real estate and other hard assets abroad, and 15.5 percent for profits in cash and stock and other liquid assets: https://www.vox.com/2017/12/19/16791936/repatriation-holiday-republican-tax-bill-explained. It’s great news for US MNCs like Medtronic or 3M. They are being rewarded for keeping profits overseas until this window opens next year…like the window that George W. Bush and the Republican Congress opened back in 2004 when they temporarily slashed corporate tax rates to repartriate MNC profits. Then repatriated funds didn’t go into new plant and equipment to make those MNCs more efficient, and it certainly didn’t go into new bridges, roads and ports to make us all more efficient. Instead it went into corporate stock and bond buy backs and one-time stock dividend payments. Look for many of the same buy-back and dividend schemes to unfold in 2018.

Bauble #3: How about a beer bauble. In the Republican tax bill itself and in the Joint Explanatory Statement of the Committee of Conference, the word “beer” occurs 69 times. It’s one of the ironies that our tea-totaling US President is about to sign a bill that gives all sorts of breaks to the beer industry. Here is one. Alcoholic beverages are subject to excise taxes. And those are going down under the bill. The big breweries will now pay $16 per barrel on the first six million barrels produced or imported rather than $18. You could look at that as giving all the big brewers and importers $12 million bucks if you are skeptical that the savings will be passed on to Sam Sixpack. If you want to so the math, there are 31 gallons in a barrel and 0.5625 gallons in a six pack. Different story for your craft brewers. The pay seven bucks a barrel on the first 60,000 and that will be cut in half: https://www.forbes.com/sites/peterjreilly/2017/12/19/tax-cuts-and-jobs-act-whiskey-for-my-men-beer-for-my-horses/#11d63dce7d82.

Bauble #4. How about a bauble in the form of a blue and white 747 “Jumbo Jet” decoration. This week, Delta Airlines will fly its last 747 around Minneapolis-St. Paul Airport for an aeronautical farewell before being retired to Arizona: http://www.startribune.com/delta-s-last-747-will-make-a-big-circle-around-msp-wednesday/465230723/. Delta’s predecessor at MSP, Northwest (Orient) Airlines had about 50 747s in the fleet in the 1990s flying to Europe and the Far East. New technologies increasing fuel efficiency and flight range along with needs for greater flexibility in fleets that might fly one day to Paris, France and another to Paris, Texas decreased the need for a “whale” aircraft like the 747 or the Airbus whale equivalent known as the A380. So are 747s gone from the skies? No way. As of last summer, at least 15 big air travel organizations still have 747s in service: Lufthansa and Cathay Pacific carrying passengers; several cargo companies like Atlas Air and Nippon Cargo Airlines; and the US Air Force –think of how the US President travels. The 747 may be gone from Delta, but not other airlines. The 747 has many Christmas celebrations to look forward to in the future.

Bauble #5: At first glance, this bauble looks like a folded piece of paper on the tree. And then you look more closely and you see that it’s a stock certificate for…Berkshire Hathaway, the holding company that the Oracle of Omaha, Warren Buffett (and side-kick Charlie Munger) turned into a multi-billion dollar success story. That B-H stock topped $300,000 earlier this week: https://www.cnbc.com/2017/12/19/warren-buffetts-berkshire-hathaway-share-price-tops-300000.html. Warren Buffett has not been a strong supporter of the Trump Administration and many aspects of the Republican tax bill. But the stock market seems to think the bill will be good for B-H. Indeed, the company stock price is up 22%, beating the more general stock market price advance of 20%. How does Buffett do it? Where can I get one of those pieces of paper for my Christmas tree?

So many business baubles. So little time.

This is my last Business by Carlson segment for 2017. My Carlson School faculty colleague, Joel Waldfogel will join Dave and all of you Good Neighbors next Wednesday to close out the month and the year. It’s such a pleasure to join you all on Wednesday mornings to talk about our vibrant local, national and international business scene. I wish you all a safe and enjoyable Holiday Season. See you in January when a new year will bring new business stories to chew over on the morning airwaves.

Best,

Paul Vaaler

(To listen to today’s episode, click here….
https://minnesota.cbslocal.com/audio/business-by-carlson/)

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