The Next Big Crisis — Energy; Tax Hikes on the Chopping Block

by Greg Valliere, AGF Management Ltd.

Insights and Market Perspectives

Author: 8

October 12, 2021

The Next Big Crisis — Energy;
New Tax Hikes on the Chopping Block
October 12, 2021
AS IF JOE BIDEN DOESN’T HAVE ENOUGH to worry about — Covid, immigration, crime, stagflation — he now faces a global energy crisis which already has engulfed Europe, China and India, as U.S. gasoline prices soar.

THE GREEN BACKLASH: Suddenly, there’s a sign that consumers are questioning tough new environmental laws, which the public increasingly thinks are responsible for higher prices. Wind and solar power, hyped by climate activists, is not sufficient to make a big difference immediately.

THE ENERGY PRICE SPIKE ALREADY IS A MAJOR ISSUE in the U.K., for many reasons — a supply crunch, the impact of Brexit, and an acute shortage of workers, especially truck drivers. Even a lack of wind this summer in northern Europe is a factor. The acute supply crunch is very good news for producers in Russia and Iran.

THIS WILL NOT BE A PRETTY PICTURE as world leaders meet in Glasgow at an energy summit later this month. Instead of bashing the Big Three of coal, oil and natural gas, many countries are desperately seeking more of those fuels as winter approaches. Curbs on consumption — including factory shut-downs — are beginning in China and India.

THE U.S. IS STILL A DOMINANT PRODUCER, but gasoline prices are up by more than $1 per gallon since spring; prices above $4 per gallon are increasingly common. This is a huge political headache for Biden, since he has few policy options; opening up the Strategic Petroleum Reserve was suggested — and quickly rejected — by administration officials last week.

THE ENERGY PRICE SURGE will take a bite out of real disposable income as the 2022 campaign season heats up. Republicans will make inflation a major theme, blaming it on huge new government spending and regulatory hostility toward energy producers. How bad could it get for Democrats? They could lose the House next year by 10 to 15 seats, perhaps more.
* * * * *
TAX HIKES ON THE CHOPPING BLOCK: As the $3.5 trillion price tag for social programs plummets to $2 trillion or less, it’s becoming increasingly clear that tax hikes will be pared back significantly in a final bill (if there is one).

IF THE DEMOCRATS NEED “ONLY” $1.5 trillion in revenues, that wouldn’t be very difficult to attain — a new 25% top corporate rate could raise about $400 billion, a new top capital gains rate of 25% would raise about $125 billion, and a top individual tax rate of 39.6% would raise about $170 billion.

OTHER REVENUE RAISERS that will be claimed by Democrats could include tougher enforcement from the Internal Revenue Service, producing (on paper) $200 billion, savings from government purchases of prescription drugs, and so-called “dynamic scoring,” the optimistic assumption of stronger economic growth, which could produce a few hundred extra billion.

THE MEDICARE SAVINGS, facing a barrage of drug industry criticism, would be controversial, as would changes in pass-through income taxes, and complex new international taxes, which are are looking inevitable in some form. But these options might not be needed to get the revenue assumptions to at least $1.5 trillion.

WHAT WOULD GET LEFT ON THE CUTTING ROOM FLOOR? The Progressives’ wish list — killing the step-up basis, toughening estate laws, taxing unrealized gains, new taxes on stock buybacks, etc. — might not survive in a final bill because, quite simply, the revenue from these provisions might not be needed in a bill costing $2 trillion or less.

VERY WELL-PAID LOBBYISTS may succeed in killing or greatly watering down the items listed in the paragraph above (lobbyists already appear to have killed reforms to “carried interest,” as usual).

THE LEFT WILL HOWL as Congress rejects new taxes on unrealized gains for the super-rich, but the Progressives’ options are clear: either accept scaled-back tax increases — or nothing at all, if the bitter fight among Democrats persists.


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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