Weekly Update - Let's talk about tax
To pay for the American Jobs Plan, the Administration intends to increase the tax burden on US companies. This was to be expected – Joe Biden’s electoral platform included a partial repeal of Donald Trump’s massive 2017 tax cuts, which reduced statutory corporate tax rates from 35% to 21%. The President now wants to increase the rate to 28% which should raise enough revenue over the next 10 years to pay for just under half of the stimulus plan. The remainder of the amounts required will be raised by taxing a larger proportion of US companies’ overseas profits. The Trump administration introduced a tax on global intangible low-taxed income (GILTI) in December 2017, set at half the 21% statutory rate, i.e. 10.5%. Biden now plans to double the GILTI tax to 21%, to eliminate certain deductions for foreign income and to establish a new minimum tax on large companies’ book income. According to a study by the Penn Wharton Budget Model, these measures in aggregate should raise $2.1 tn over the next 10 years.
However, this proposal would mean a sharp increase in costs for US-based multinationals, raising the risk that companies might seek new domiciles in lower-tax jurisdictions. It is no surprise therefore that US Treasury Secretary Yellen has signalled this week her willingness to accelerate talks on a global minimum tax rate. These discussions have been coordinated by the OECD in recent years and have included proposals for a digital services tax (DST), which would enable governments to tax revenues and profits generated by technology and internet companies with no physical presence in the country. The DST proposal was fiercely resisted by the Trump Administration, which viewed it as blatant discrimination against US digital leaders – the US reacted with a “safe harbour” measure, allowing US companies to opt out of compliance with the DST.
Janet Yellen’s shift in stance marks a return to multilateral engagement with international institutions, in contrast to Trump’s strict “America First” doctrine. She has proposed that the global minimum tax be set at 21% and signalled that the US would abandon the safe harbour policy. While this shift will be welcomed by the European Union, which has been advocating both a global minimum rate and a DST, it is by no means certain that a quick agreement can be reached.
First, the OECD’s discussions have revolved around a 12.5% minimum rate. An increase to 21% will likely be resisted by countries like Ireland which have successfully used their low tax regimes to attract inward investment and jobs. Second, countries have very different needs for tax revenue. According to the OECD, government expenditure as a percentage of GDP varies widely, ranging from 24.5% in Ireland to 38.1% in the US to 55.6% in France. Third, there is sure to be strong opposition from Republicans and some moderate Democrats in Congress to Biden’s tax proposals. Biden cannot afford to lose more than 3 Democratic votes in the House and none in the Senate if he is to get the legislation through. Finally, the Biden White House has not given up on punitive tariffs – the US Trade Representative still plans up to 25% tariffs on some imports from 6 countries – including Italy, Spain and the United Kingdom – which have introduced DST legislation.
Bottom line. Rapid rises in global corporate taxes are unlikely and President Biden may be forced to compromise on his planned increases. This means that budget deficits are likely to remain under pressure, encouraging central banks to maintain easy monetary policy settings. Regarding equities, 2017 showed that changes in the tax code do not have a lasting impact on stock market performance – our preferences for cyclically-sensitive sectors and markets and Value stocks remain unchanged.