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.
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This post was first published at the AGF Perspectives Blog.
