U.S. President Joe Biden poses with supporters after visiting King Orchards Farm in Central Lake, Michigan, July 3, 2021.
Joshua Roberts | Reuters
Almost six months after the presidency Joe biden administration, Wall Street remains divided on the likelihood and impact of one of Democrats’ main election promises: higher taxes.
As the president and his cabinet made strides in persuading foreign partners support a global minimum corporate tax rateTeam Biden doesn’t seem any closer to pushing through the kinds of sweeping tax reform it promised in its 2020 campaign.
Among the many components of the Biden tax plan are an increase in the national corporate tax rate to 28% from 21% and the top personal income tax rate to 39.6% from 37%. The White House also wants to increase the capital gains tax rate for those who earn more than $ 1 million a year, from 20% to 39.6%.
But with the GOP determined against tax hikes, and with a handful of economists concerned that raising taxes now could risk economic recovery, some say the outlook for the administration’s tax plans has dimmed. darkened in recent months.
The chances of big tax reform in the short term seem slim, said Tony Fratto, who was a treasury official in the administration of George W. Bush.
“I don’t want to say the fight is over on this just yet because I know there are still supporters of it. But I think it’s tough fights,” he said on Tuesday. morning. “On the business side, by getting out of the economic situation we find ourselves in, you can argue that you don’t want to stifle the return to growth and job creation when there are still millions people out of work compared to pre-Covid. “
Although last year’s economic recovery has yet to return the labor force to its former size, the employment situation was even worse when Then-candidate Biden touted his ambitious tax reforms on CNBC in May 2020.
Higher taxes on capital gains and on the rich would not only help finance government stimulus measures, Biden said at the time, but also close the growing wealth gap in the United States by forcing the rich to pay what he considered their fair share.
“My tax policy is based on a simple proposition, which is to stop rewarding wealth and start rewarding work a little bit,” Biden said on May 22, 2020. “Taxes will rebuild a better economy, boost it. , create a middle class and create jobs, the paycheck protection program, health care, the confidence to come back. ”
To be fair, the lack of progress on tax reform is not necessarily due to the Biden administration’s lack of effort.
Any mention of an increase in the domestic corporate tax rate from its current level of 21% is a non-starter for republicans and some economists, who say it’s still too early in the economic recovery to ask businesses across the country to send an even larger proportion of their profits to Uncle Sam.
This opposition is a major obstacle for Democrats, who hold a slim majority in the House and are split 50-50 with the GOP in the Senate.
Despite a $ 1.9 trillion Covid-19 bailout bill, an additional $ 1.2 trillion, and an additional $ 1.8 trillion physical infrastructure plan proposed for families, daycares and paid time off programs for workers, the Biden administration has so far failed to push its tax proposals that far.
Tax increases are “off the table,” Senator Mitt Romney, a Utah Republican involved in bipartisan infrastructure talks, told reporters last month. Senator Jon Tester, a Democrat from Montana who joined the negotiations, said at the time that paying for infrastructure “is probably the hardest part about it, from my perspective.”
BlackRock, the world’s largest asset manager, told clients at the end of June that he was still waiting for Biden’s White House raise some taxes to help offset the historical level of expenditure.
“The direction of travel for corporate taxes, while the outlook is uncertain, is higher,” Kurt Reiman, BlackRock’s senior strategist for North America, told CNBC. “We believe the Democrats will use this open window during the summer and fall, before campaigning for the midterms, to advance their legislative agenda.”
Specifically, BlackRock executives have warned that if the proposed corporate tax rate of 28% and a global minimum tax of 21% were imposed, the S&P 500’s earnings per share could drop as much as 7% in 2022.
Reiman and his colleagues believe that while Democrats are likely to be successful in raising tax rates, the hikes will be more modest than Biden’s initial proposals. They note, for example, Biden’s willingness to consider a more moderate increase in the top corporate tax rate to 25%, as advocated by key centrist Senator Joe Manchin, DW.Va.
“These programs will have to be funded in part by higher corporate tax rates – and perhaps even individuals – if they are to go through the Senate as part of reconciliation,” Reiman added.
Others have a more pessimistic view of Biden’s ability to muster enough support for higher levies.
“We do not believe that US policy will hurt US stocks in absolute terms, as it is unlikely that Biden will be able to implement some potentially market-unfavorable tax / technology regulation proposals,” the JPMorgan’s equity strategy team to clients on Monday.
“In relative terms, however, investor sentiment could be hampered as there is a timeliness risk regarding some of these policies,” they added.
For Bush-era treasury official Fratto, the tense negotiations between Republicans and Democrats over how to pay for infrastructure are almost absurd given the low cost of borrowing.
“Borrowing has been cheap for a long time. It’s extremely cheap now, and it’s not clear that that’s going to change,” he said. “When you don’t have this pressure from the ever-increasing cost of your debt, the arguments for payment get really tough.”
Between the Federal Reserve’s accommodative monetary policies and strong demand for US debt around the world, interest rates on US bonds have fallen for much of the past decade. The 10-year Treasury bill rate, which traded north of 6% in 2000, was last seen around 1.3% after wallowing below 1% for much of 2020.
But Fratto is not alone in seeing untapped potential in the sovereign debt market.
Citigroup strategist Vikram Rai has touted for months the appeal of a Obama-era tool known as Build America Bonds. These special, taxable municipal bonds allow states and counties to issue debt with interest charges subsidized by the federal government.
The Obama administration first introduced bonds (known as BABs) in 2009 to fund investment projects and revive a struggling US economy as it emerged from the Great Recession.
“The arguments on paper throughout my career in Washington, dating back to the late 1980s and early 1990s, was this story that was told that we have to pay for [stimulus]. Otherwise, bond rates are going to skyrocket or we’re going to have inflation, ”Fratto said.
“Whatever limit would lead to saturating the market with treasury bills, we have not discovered it,” he continued. “And we seem to be a long way from it.”
– CNBC’s Michael Bloom contributed reporting.