The Republican tax overhaul, passed in December, has saved some of America's largest corporations billions in taxes. The legislation, which reduced the corporate tax rate from a maximum of 35% to 21% and incentivized corporate giants to repatriate cash stored overseas in more tax-friendly jurisdictions, has been viewed as providing a bigger boost to some sectors of the economy than others. A recent report from the Associated Press supports the thesis that Big Banks are some of the top winners of the new tax plan, landing a whopping $3.6 billion in tax savings in the most recent quarter. (See also: Tax Cuts Less Popular with Voters: NBC/WSJ Poll.)
Financial institutions, among the first companies that typically ring in the corporate earnings season in the U.S., have historically paid some of the highest taxes due to their domestically centered business models. As a result, banks have seen their tax rates cut by a larger amount relative to other industries such as tech, which enjoyed lower rates over the recent years as their double-to-triple-digit returns and earnings growth made them Street favorites.
A Big Six Bonanza
It should therefore come as no surprise that banks overwhelmingly supported the Trump administration as they championed the new tax bill last year. America's leading banks such as JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) saw their tax rates fall below 17% and 23% for the January through March quarter. Bank executives at the Big Six banks foresee full-year tax rates between 20% and 22%, according to the AP.
While the Trump tax cuts were touted as a means to spur economic growth, jobs and wages in the U.S., many have criticized the bill for its negative effect on the burgeoning federal budget deficit and suggest that it disproportionately benefits the wealthy and big corporations. The tax cuts have worked to bring bids for mergers and acquisitions in 2018 to their highest level since the start of the millennium and have spurred a record amount of cash flowing back to investors via share buybacks. The AP indicated that tax savings will be used by banks to return value to shareholders through higher dividends and share repurchases, as well as to higher wages and other business investments, including new branch location plans for JPMorgan and Bank of America Corp. (BAC). (See also: US Budget Deficit to Top $1 Trillion by 2020: CBO.)