Impacts of Cutting Corporate Tax Rates

Introduction:

On February 22, 2012, President Barack Obama announced a proposal that asked Congress to cut the corporate tax rate from 35 percent to 28 percent. This proposal caused big presidential debates on whether the U.S. corporate tax rate should be cut or not. There are both positive and negative effects on cutting the tax rate. On the one hand, cutting the corporate tax rate can benefit most companies by reducing tax bills. On the other hand, it may cause large write-downs by some companies who have large amounts of the net deferred tax assets, and result in larger tax expenses and less net income. Consequently, cutting the corporate tax rate may reduce companies’ financial performance reflected by the financial statement. This paper discusses the impacts of cutting the corporate tax rates by using the financial statements of the Ford Motor Company and the Lockheed Martin Corporation.

Income Taxes on Ford and Lockheed’s Financial Statement:

Ford Motor Company is one of the world’s largest automobile manufacturers. In 2012, they had $15,185 million in deferred income tax assets, and $470 million in deferred income tax liabilities. So they have the net deferred tax assets of $14,715 million. In the note for income taxes in the financial statement, it shows that Ford has $2,056 million in income tax expenses, $1,779 million in total deferred tax change, and $277 million in total current tax payable.

By contrast, Lockheed Martin Corporation is a global security and aerospace company. They have $1,269 million in current deferred income tax assets and $4,809 million in non-current deferred income tax assets, and a total of $6,078 million in the net deferred tax assets. As shown in their financial statement notes, they have $1,327 million in income tax expenses, $926 million in total deferred tax change, and $401 million in total current tax payable.

Codifications of Corporate Tax Rates for Deferred Taxes:

The Accounting Standards Codification states...