Sweeping Biden Tax Proposals Encounter Headwinds

by Greg Valliere, AGF Management Ltd.

EVEN PRESIDENT BIDEN CONCEDED yesterday that his radical tax proposals are negotiable. “Debate is welcome. Compromise is inevitable. Changes are certain,” he said.

THERE’S A GROWING CONSENSUS IN WASHINGTON that his tax proposals are more than just a debate over how to pay for $2.25 trillion in infrastructure spending. It’s an opportunity to impose major new reforms to corporate tax laws, especially as they apply to foreign income.

BIDEN’S ALLIES HAVE CONCEDED that it’s not necessary to pay for all of his infrastructure package, which enjoys generally good support in Congress; it could be funded out of general revenues, as was the $1.9 trillion Covid aid bill last month.

THIS IS AN OPPORTUNITY to increase corporate tax revenues, which have fallen to about 1% of GDP, with many firms not paying any taxes after enactment of Donald Trump’s 2017 tax bill. The tax provisions proposed yesterday are an attempt to appease progressives, who believe corporations aren’t paying their fair share.

IT’S POSSIBLE THAT ALL 50 SENATE REPUBLICANS will vote against the Biden tax proposal. There are simply too many controversial provisions; ironically, raising the top rate to 28% from the present 21% is something many businesses can live with, but there are other proposals that are more controversial.

THUS EVEN BIDEN HIMSELF may have to compromise on a 15% minimum corporate tax on huge corporations, a 21% international corporate tax, the elimination of all tax breaks for fossil fuels, etc. And his ability to win passage of a tax bill through the reconciliation process is in doubt — because he’s not guaranteed of winning the necessary votes from all 50 Senate Democrats.

AS USUAL, THE KEY PLAYER in this upcoming debate will be Sen. Joe Manchin, the moderate Democrat from West Virginia, who doubled down yesterday. Not only is he adamantly opposed to weakening filibuster rules, but Manchin apparently is also opposed to using reconciliation. And he will not agree on a 28% top corporate rate.

A MORE CONSEQUENTIAL DEBATE is looming on foreign taxation. Treasury Secretary Janet Yellen, in a Wall Street Journal column yesterday, made an impassioned plea for a uniform global tax rate, but the idea that all nations will agree to stop a “race to the bottom” on tax rates strikes us as naïve. France might agree, but what about Ireland or the Bahamas?

BOTTOM LINE: Biden still appears likely to win a huge infrastructure bill, but we continue to believe he faces a haircut, especially on enormous safety net provisions. And while there will be some tax hikes — the top individual rate is likely to rise by a point or two — major new corporate hikes will be watered down.

THE RESULT, THEREFORE, COULD BE another massive spending bill that isn’t fully paid for — as the deficit in this fiscal year surges past $3 trillion. Vastly more spending without much in terms of offsetting revenues is not a welcome scenario for the fixed income markets.


The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

©2021 AGF Management Limited. All rights reserved.

This post was first published at the AGF Perspectives Blog.

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