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Why does it follow that a tax cut will increase a company's earnings? Maybe the cut will get competed away. I think this will happen with banks.
A business with a strong competitive advantage may get to keep the the tax cut. But for a lot of companies, competition will result in the customer getting the benefit.


You make a lot of sense.
But probably not for every firm.
It likely depends on the economic characteristics of the firm in question: the moat question.

If you are in a business that is highly competitive, and the constraint on new competitive entrants
is the cost of capital, then I think your observation will be true on average.
Consider a basic widget industry with three competitors. (Picture mobile phone services, if you need an example).
The reason there isn't a fourth competitor already is that it costs a lot of money to get into the business,
and it's not worth raising money to break into a three-way fight as a fourth competitor. The returns just aren't that great.
If the taxes of the existing three fall, then their aggregate costs fall, and (on the first day at least) their margins and profits and ROA rise.
It's now a great business! But that guy considering entering the fight sees those juicy margins and now decides to raise the capital and enter the business, undercutting the first three by a bit.
This turns into a price war, till all four have margins that are just unattractive enough to interest a fifth potential competitor.
Prices and margins fall, and ROA drops to its original level, close to the cost of capital for a new
potential competitive entrant, so all the tax cut benefit goes to the consumers not the shareholders.

But for a company with a barrier (not a mere cost hurdle) to competitive entry, the lower tax is simply
a lower cost and there is no particular reason to drop prices. Say, a private airport near a major population centre.
The tax cut would fall straight to the bottom line.
You know your clients are happy enough to buy your services at current prices, and they see no close substitute, so why cut prices?

The biggest effect among companies with ordinary economics is that it puts them in a better position relative to competitors based in lower tax jurisdictions.
If you are that rare US firm paying headline tax rates, that's just about every firm outside the US.

(For those tempted to feel the Bern about all this tax race to the bottom, remember that corporate tax is just a fancy and inefficient way of taxing shareholders.
As long as the shareholders get taxed one way or another, it doesn't really matter whether there are high or low or no corporate taxes.
The simplest and most well proven method is a sales tax (better, a VAT)---few rich people spend nothing)

Jim
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