All Aboard the Tax Bandwagon

Hey Influence Traders,

Infrastructure spending is going up!

Social safety net spending is going up!

So …

Taxes are going up!

The Tax Bandwagon

Everyone (well, almost everyone) is joining the call for higher taxes.

From Joe Biden and Janet Yellen to Bernie Sanders and Liz Warren — it’s tax time, baby!

Heck, even the United Nations Secretary-General is calling for more taxes.

Of course, some aren’t on the tax train. (Including you, probably.)

Among other things, taxes will disrupt corporate earnings — which causes ripples.

But let’s look at who is askin’ for taxin’ …

Joe Biden

The President has made it clear that he is hiking corporate taxes to pay for his massive infrastructure plan.

He intends to raise the corporate tax rate from 21% to 28%, which he believes will bring the U.S. in line with other countries.

That reasoning is based on a conclusion by the Organization for Economic Cooperation and Development that the U.S. raises less corporate tax revenue as a share of GDP than most other first-world economies.

And, fair enough, corporate tax receipts today are at their lowest levels as a share of GDP since World War II.

Through the 1970s, many corporations paid half their profits in federal taxes. But that percentage has been declining and it is putting U.S. companies in the crosshairs.

According to the Institute on Taxation and Economic Policy, at least 55 big companies paid zero federal income taxes last year.

That does not sit well with many politicians.

Those leaders see the drop in corporate tax rates as a de facto decline in the tax rates on wealthy Americans because much of their holdings are in stocks.

That’s also not popular among pols.

Janet Yellen

Through an intricate web of deductions, exemptions and offshoring, many corporations pay well below the 21% tax rate.

To offset that, Biden wants to impose a 15% minimum tax on “book income.”

Book income is profits that firms report to investors — but they aren’t used to calculate tax liability.

As such, companies can be profitable and reward shareholders and executives — but pay nothing in taxes.

The administration would require companies with $2 billion-plus in annual income to pay a minimum 15% on book income.

The ITEP estimated that 45 corporations would have to pay under the proposal.

Meanwhile, Treasury Sec. Janet Yellen would like to double the global intangible low-taxed income (GILTI) to 21%.

GILTI is the income earned by foreign affiliates of U.S. companies from intangible assets such as patents, trademarks and copyrights, per the Urban-Brookings Tax Policy Center

Furthermore, Yellen’s proposal would close the gap between what companies pay on overseas profits and what they pay on income earned in the U.S. She has also proposed calculating the tax on a per-country basis, which would subject even more overseas income to taxation.

Bernie Sanders

Sen. Sanders has proposed an estate tax bill, known as the “For the 99.5% Act,” that would reduce the estate tax exemption to $3.5 million per individual (down from $11.7 million) and $7 million per couple (down from $23.4 million).

The bill also adds higher tax brackets for larger estates:

        • Current 40% tax rate would be raised to 45%
        • Estates greater than $10 million would be taxed at 50%
        • Amounts greater than $50 million at 55%
        • Amounts greater than $1 billion would be taxed at 65%.

The proposal would apply the same rates to gift taxes, with the base threshold lowered to $1 million.

Sander’s bill also attempts to raise the corporate tax to 35%, but that part of the bill will not fly given the contradiction with Biden’s plan.

On the flip side of the aisle, Sens. John Thune (R-S.D.) and John Kennedy, (R-La.), introduced legislation to repeal the estate tax.

That will be an interesting debate.

Liz Warren

Sen. Elizabeth Warren has proposed a 2% annual tax on wealth over $50 million, rising to 3% for wealth over $1 billion.

Her bill is called the “Ultra-Millionaire Tax Act” and she believes that it will close the wealth gap.

Other Players

Even the United Nations Secretary-General Antonio Guterres is calling for more taxes, recently urging countries to institute wealth taxes to help mitigate inequity.

During a recent address at the U.N., Guterres said that the rich had a $5 trillion surge in wealth during the pandemic while those at the bottom became more vulnerable.

He believes that government debt hurts the poor and that nations need to offset that impact through taxes on the wealthy.

Counterpoint

Not everyone likes the idea of higher taxes, particularly corporate taxes.

Republicans are generally opposed, with Senate Minority Leader Mitch McConnell vowing to fight the plan “every step of the way.”

The Congressional Budget Office (CBO) is also not on board.

A CBO study indicates that federal investment financed by an increase in taxes would lead to lower economic output and personal consumption.

The CBO concluded that tax hikes would outweigh the economic impact of $2 trillion-plus being spent on infrastructure.

Taxes decrease private spending and private spending has a greater economic impact than governmental spending.

The CBO concluded that federal investments deliver only half the economic returns as private sector investments.

Taxes are going up – to what extent we will have to wait and see.

Cutting Through the Noise for You.


Frank

 

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