The year 2018 was a landmark one for corporate taxes in the US. Until the end of 2017, the corporate tax rate was 35%; afterward, it dropped to 21%. According to the US Government Accountability Office, the effective corporate tax rate in the US - the percentage of income paid after tax breaks – has been roughly half the statutory rate. The decline in corporate tax rates is reflected in the importance of the theme ‘taxes’ on earnings calls.
As we’ve done previously, we use large language models of AI to extract sentiment on earnings calls using ProntoNLP in a way that lets us extract and rank the importance of a fixed set of the top themes on earnings calls each year since 2010. By far, the change in the importance of the tax theme has been the largest. The downward trend in the chart after 2018 is clear. Companies have moved away from considering taxes worth commenting on.
In 2021, Treasury Secretary Yellen had the US join a global tax deal, which the Financial Times recently (February 28) called the biggest tax reform in over a century. A key feature was the attempt to update the international tax system for the digital age. The global taxes of large companies, including big tech, would increase. The deadline is this June, and to get this done, the so-called digital service taxes in the deal would be avoided until 2025. Politics has stalled US approval. The Biden administration supports the tax reform, but the Senate cannot get the 67 votes needed to overcome Republican opposition. A Trump administration would likely block its passing. Perhaps companies are ignoring the tax issue and waiting to see how the November elections change the political calculus. Yet, as the Wall Street Journal reported (March 4), other governments are exploiting tax loopholes relevant to the global tax deal (using so-called refundable tax credits).
How these global tax tensions get resolved is uncertain. The fate of the proposed digital service taxes impacting big tech is wrapped up in politics, but there are scenarios where tech profits would be hurt, impacting the market. Perhaps it is too early for companies to address this. Yet, the collapse of the importance of taxes as an issue for companies to discuss means vulnerability to surprise. Given that the 2018 reduction in corporate taxes was a Trump administration achievement, it would not be surprising if corporate tax rates became an issue in this year's presidential politics.
