This week in Bidenomics: Tax hikes recede
The hot topic of Bidenomics is federal unemployment benefits, and if they prevent millions of unemployed Americans from looking for work. The latest employment report, showing 559,000 new jobs created in May, was inconclusive. That’s a rapid pace of job growth, but less than economists expected given the economy’s rapid recovery. Both sides of the argument have ammunition.
But this issue will be resolved soon, since federal unemployment assistance expires in September. If generous unemployment checks cause a labor shortage, it won’t last long. Long-term tax and spending changes are more important to the markets President Biden is pushing as part of his efforts to transform the economy, and this week’s dormant news was a change in tax hike strategy from Biden.
In discussions with a key Republican senator, Biden suggested he would drop his plan to raise the business tax if it helped secure a bipartisan infrastructure deal, according to the Washington Post. Biden has proposed a series of tax hikes to pay for green energy investments, a construction boom, and new welfare programs. One of them is an increase in the corporate tax rate from 21% to 28%, which Republicans say is a deal breaker. The GOP’s tax cut law of 2017 cut the corporate tax rate from 35% to 21%, and there probably isn’t a single Republican in Congress who would reverse this change, even at a lower rate. to what it was before.
Biden’s new idea, apparently, is to generate revenue from another tax hike: a 15% minimum tax on large companies that make more than $ 2 billion in profits. This is for profitable businesses that manage to reduce or eliminate their federal tax bill due to deductions and loopholes. Biden also wants to strengthen the Internal Revenue Service’s enforcement, allowing it to better collect billions in taxes that rich Americans owe but don’t pay. If Biden eventually drops his corporate tax hike, that’s good news for stocks and investors, even if smaller corporate tax hikes remain on the table.
These negotiations will take many twists and turns in the months to come, with leaks and test balloons and postures from both Democrats and Republicans designed to make one side seem reasonable and the other not. Biden’s latest “concession” is likely part of the game, and he hasn’t publicly acknowledged it. Despite this, by signaling flexibility on one of his main income generation plans, Biden has lowered the bar in terms of the end result. The odds of Congress raising the corporate tax rate to 28% are now probably less than one in ten.
There are many moving elements in Biden’s legislative plans, and even ardent congressional watchers struggle to keep everything in order. Biden proposed two giant legislative packages, the American employment plan and the American Family Plan. The AJP is the green energy and infrastructure package. AFP includes social protection reforms. But Congress writes the laws, not the president, and not everything that gets voted on will be as wrapped up as the two Biden plans. There could be a giant invoice including some of the two plans, or two invoices more or less suited to Biden’s outlines, or multiple invoices each including parts from both plans.
Biden’s wishlist appears to start with a bipartisan infrastructure bill, even though he has to sharply reduce his demand from $ 1.7 trillion in spending to $ 1 trillion or less. There are still major sticking points that make this highly unlikely. Republicans want the majority of spending to come from money Congress has already allocated in past relief bills, including the US bailout that passed in March. This would require a clawback of the clawback aid that has gone to states and cities, which Democrats do not support. Still, both sides claim some sort of compromise is possible, assuming Biden abandons the corporate tax hike.
If an infrastructure bill were passed with the support of the GOP, Democrats would not have to use the reconciliation process that allows them to pass a bill with a simple majority vote instead of a majority. of 60 obstruction-proof votes. This has become momentous because of another obscure news this week: The unelected official who sets the rules of the Senate said Democrats who control the Senate can spend just one more invoice using the reconciliation process in the current fiscal year, which ends September 30.
For the three people who continue to pay attention, that means Senate Democrats cannot pass Biden’s two legislative packages this year using the simple majority reconciliation process. They could pass one this year and one next year, assuming all Democrats agree, but that would become risky as 2022 is a year of midterm elections, when it is notoriously difficult to do so. adopt major legislation. So passing a lightweight infrastructure bill with Republicans backing would still leave Democrats with a big welfare plan that they could pass in 2021 without any Republicans.
A corporate tax hike could appear in any piece of legislation. Democrats could exclude it from an infrastructure package, but insert it into a social protection package. Republicans know this and are unlikely to be fooled. The bottom line is that Biden’s allusion to concessions and the new reconciliation decision point to Republican leverage and a sobering reality check for Biden’s tax hikes.
A 28% corporate tax rate was unlikely anyway, given that a few Democrats believe it’s too high. Raising it to 24% or 25% was plausible, but Biden himself could undermine it with discussions of alternatives. Analysts believe the full Biden tax hike would be reduce corporate profits by around 6%, which in turn would likely drive down stock prices. The actions can however benefit from a stay. Investors need only notice it.
Rick Newman is the author of four books, including “Rebounders: How Winners Go From Failure To Success.»Follow him on Twitter: @rickjnewman. You can also send confidential advice, and click here to receive Rick’s stories by email.
Get the latest financial and business news from Yahoo Finance