Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 (often abbreviated as TCJA) was a landmark piece of U.S. legislation that enacted a sweeping overhaul of the American tax code. Signed into law in December 2017, it represented the most significant tax reform in over three decades. For corporations, the centerpiece was a dramatic and permanent reduction of the top corporate tax rate from a tiered system that went up to 35% to a flat 21%. It also shifted the U.S. from a “worldwide” tax system, where companies paid U.S. tax on global profits, to a “territorial” system, largely exempting foreign earnings. For individuals, the TCJA introduced temporary tax cuts across most income brackets, increased the standard deduction, and modified or eliminated various other deductions. For value investors, the TCJA was a seismic event, as it instantly altered the fundamental profitability and Valuation of nearly every U.S. company, forcing a complete reassessment of their long-term earning power.

The TCJA was a complex bill, but its impact on investors can be understood by focusing on a few monumental changes.

This was the big one. Slashing the corporate tax rate to a flat 21% had an immediate and profound effect on corporate bottom lines. Imagine a company earning $100 million in pre-tax profit.

• Before TCJA: At a 35% tax rate, it would pay $35 million in taxes, leaving $65 million in Net Income.
• After TCJA: At a 21% tax rate, it pays just $21 million in taxes, leaving $79 million in net income.

That’s a 21.5% increase in after-tax profit without the company selling a single extra product! This mechanically boosted Earnings Per Share (EPS) figures across the board, which in turn made stock valuation metrics like the P/E Ratio look much more attractive overnight. A company’s earnings (the ‘E’ in P/E) shot up, making its price (the ‘P’) seem lower in comparison.

For decades, U.S. multinational corporations had stockpiled trillions of dollars in foreign subsidiaries to avoid paying the high U.S. tax rate upon bringing the money home (a process called repatriation). The TCJA changed the game in two ways:

1. It established a “territorial” system where future foreign profits would face little to no additional U.S. tax.
2. It imposed a one-time, mandatory tax on all accumulated overseas profits—at a significantly reduced rate (15.5% for cash and 8% for non-cash assets).

This “deemed repatriation” tax unlocked a flood of cash that had been trapped overseas. Companies put this newfound capital to work through a variety of actions, including:

• Massive Share Buybacks to boost stock prices.
• Increased Dividends paid out to shareholders.
• Funding for Mergers and Acquisitions (M&A).
• Reinvestment in domestic operations and capital expenditures.

The TCJA also created a new 20% tax deduction for owners of Pass-Through Business entities (like sole proprietorships, partnerships, and S-corporations). While more complex than the corporate cut, this provision lowered the effective tax rate for many small and medium-sized businesses, impacting investors who own such businesses directly or through private funds.

For a practitioner of Value Investing, the TCJA wasn't just news—it was a direct command to get back to work and re-evaluate everything.

The core of value investing is calculating a business's true Intrinsic Value based on the cash it will generate in the future. Since taxes are a direct claim on a company’s cash, a permanent 14-percentage-point drop in the tax rate fundamentally increases a company's long-term earning power and, therefore, its intrinsic value. Any prudent investor had to update their Discounted Cash Flow (DCF) models. By changing the tax rate assumption from ~35% to 21% for future years, the projected Free Cash Flow (FCF) would be substantially higher. This meant that, on paper, most U.S. businesses became significantly more valuable the day the law was signed. As Warren Buffett noted, his company, Berkshire Hathaway, saw its book value increase by nearly $30 billion overnight, simply due to the revaluation of its Deferred Tax Liabilities.

The critical question for a value investor was distinguishing between a one-time “sugar rush” and a catalyst for sustainable growth. Did the earnings growth come from a genuine improvement in the business, or was it just an accounting artifact of the lower tax rate? The smart investor looked beyond the initial EPS jump and asked:

• How is management using the tax savings? Are they reinvesting it wisely to widen the company’s Competitive Moat, or are they just using it for buybacks to provide a temporary lift to the stock price?
• Is the company’s pre-tax income growing? A company whose core operations are stagnating is still a mediocre business, even if it now pays less tax.

A final, crucial point: while the corporate tax cut is permanent, almost all the individual tax changes are scheduled to “sunset,” or expire, after 2025. This introduces political risk into long-term financial planning. Future administrations and Congresses could alter or reverse these policies, including the corporate rate. As always, a value investor must factor in a margin of safety and consider the risk that today’s favorable tax environment may not last forever.