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WE CONTINUE TO BELIEVE MAJOR TAX HIKES are unlikely this year, as the Biden Administration backtracks on ambitious proposals that simply don’t have strong support in Congress.
THE LATEST RETREAT came from the Treasury Department. Secretary Janet Yellen had vowed to resist a “race to the bottom” in global tax rates, but Treasury said yesterday that a 15% global rate is the new floor for negotiations, not the 21% rate Yellen had endorsed.
AS WE HAVE LONG SUSPECTED, it’s going to be very difficult to get every country to go along with a uniform rate; Ireland, for example, may continue to out-bid major European countries — keeping its rates ultra-low in an attempt to attract corporate headquarters.
THE WILLINGNESS OF TREASURY TO ACCEPT A 15% RATE sends a signal that the administration is eager to negotiate on tax hikes, which have generated intense opposition from U.S. corporations and their lobbyists in Washington. None of the 50 Senate Republicans are likely to support tax hikes, while not all of the 50 Senate Democrats may support higher taxes.
THIS TAX REBELLION will extend to other provisions. It’s virtually certain that Biden will not prevail in raising the top corporate rate to 28%, up from 21% now. For him to get even 24% or 25% will require unanimous support from Senate Democrats.
OTHER PROVISIONS ARE LIKELY TO BE WATERED DOWN: The Biden Administration will not get major estate tax reforms passed, including the abolition of the step-up basis provision. And while the top capital gains tax rate may rise to nearly 30%, there’s no chance that capital gains will be taxed as ordinary income.
IT WILL TAKE MANY MONTHS for a tax bill to emerge. An infrastructure bill could take shape by mid-summer, but the other two Biden proposals — a massive social spending package and the tax hikes — may languish until well into the fall.
WE’RE TEMPTED TO PREDICT that no tax hike will pass this year, but there’s still a chance that the top rate for wealthy Americans could rise by a point or two, with the top corporate rate rising by three or four points. And the IRS will win significant new funding to increase its enforcement and audits.
MONEY MANAGERS WILL NEED TO FOLLOW the tax narrative closely, because the threat of tax changes could become an issue this fall. But we will stick with our mantra — do major big tax hikes have the votes to prevail in Congress? The answer is no, with an election looming next year and Republicans prepared to make tax hikes a major campaign theme.
SO IT LOOKS LIKE TAX HIKES LITE, with nothing major on the horizon that has a chance of passing. There are still economic headwinds — the hugely successful payroll protection program, a life preserver for small businesses, has run out of money. But the threat of significantly higher taxes is not one of the headwinds.
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