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Table 3: Estimated 10-year* revenue impact from tax plans, $bn
Based on estimates from both the Tax Policy Center and Tax Foundation

House Plan Trump Plan
Corporate Tax Reform -890 to -1200 -1940 to -2630
Lower corporate tax rate (20% under House, 15% under Trump) -1800 to -1850 -2120 to -2350
Full capex expensing; interest expense no longer deductible (mandatory under House, choice between two under Trump)** -450 to -1040 -320 to -590
Deemed repatriation of overseas earnings 140 to 190 150-200
Move to territorial tax system -90 to -160 n/a
Border adjustment 1070 to 1180 n/a

Changes to individual income/payroll taxes -980 to -2020 -2190 to -3730

Repeal estate/gift taxes -190 to -240 -170 to -240

Total (static) estimate -2420 to -3100 -4370 to -6150
*Tax Foundation assumes impact over 2016-2025 and Tax Policy Center assumes impact over 2016-2026
**Under House plan, Tax Foundation separately breaks out estimates for full capex expensing (-$2236) and disallowing interest deduction on new loans (+$1194).
Note: estimates rounded to nearest ten billion, with range to incorporate estimates from both sources. Other elements to corporate tax reform not itemized above include eliminating the AMT, repealing certain corporate tax deductions, etc.
Source: Urban-Brookings Tax Policy Center, Tax Foundation, BofA Merrill Lynch US Equity & US Quant Strategy (calculation of ranges)

From a sector and industry perspective there are haves and have-nots based on each policy, but in aggregate most sectors have some puts and some takes based on tax reform. The table below shows some relevant aggregate statistics by sector that inform our subsequent analysis.

Table 4: Estimated overseas cash vs. last 12 month effective tax rate vs. COGS net exports by sector

Est. cash overseas ($bn) Overseas cash % mkt cap Effective tax rate LTM Net % imported vs exported COGS
Sector
Discretionary 75 2.9% 28% -14%
Staples 68 3.2% 29% -13%
Energy 39 2.6% 21% -3%
Health Care 187 7.0% 23% -4%
Industrials 127 6.0% 26% 1%
Technology 647 14.9% 20% -9%
Materials 24 4.0% 23% 3%
Telecom 1 0.2% 29% 0%
Utilities 2 0.3% 28% 0%
S&P 500 ex. Financials & Real Estate 1,170 5.7% 25% -6%
Source: BofAML US Equity & Quant Strategy, FactSet, Bloomberg

Cutting the corporate tax rate
The best starting point for analyzing corporate tax reform is the US statutory corporate tax rate, as this rate is critical in determining the impact of other proposed changes (border adjustments, interest deductibility, etc.). If the tax rate were lowered from 35% to 20% and the US moved to a territorial tax system (no longer taxing foreign profits), all else equal, we estimate an initial boost to S&P 500 EPS of 12% ($17 to 2018 EPS). However, over time, some of this benefit could be passed on to customers via lower prices — for instance, it is unlikely that there will be any major long-lasting impact from tax reform for Utilities sector profits, as any benefit/cost would likely be passed through to customers when incorporated into each company's regulated pricing. The benefit would also be offset by some of the other changes discussed in subsequent sections. We assume that S&P 500 companies would be able to retain half of the benefit, or roughly $8 of 2018E EPS. Below, we show the estimated EPS impacts on each sector based on a tax rate of 20%.

4 Equity Strategy Focus Point | 29 January 2017
Bank of America Merrill Lynch
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