USA: Tax increase as new source of funding
13.04.2021 18:21 - La Financière de l'Echiquier
Experience shows that sometimes we can find unsuspected reserves when we have our backs to the wall. So it isn’t surprising that the US, faced as it is with a wall of debt, is currently rediscovering a source of funding that it had consistently reduced over recent years and even decades: corporation tax. US Treasury Secretary Janet Yellen has just announced that the US will look to construct a broad global consensus on a minimum corporation tax rate. This would be between 21% and 28% for profits generated domestically, and a minimum of 21% for profits generated elsewhere in the world. This is a modest level compared with the rates in place in many countries, particularly in Europe, but it represents a revolution in the US, where the last move was actually a cut in the corporate tax rate introduced by Donald Trump shortly after he came to power.
Is the global minimum tax looming?
This rapid change of heart by the US is not simply due to the arrival of a Democratic government—it has understood that this is in its interests, given the almost limitless spending spree embarked upon by the State. Indeed, the fiscal stimulus packages put in place by the US to deal with the COVID-19 crisis are approaching 27% of GDP according to the IMF. And that isn’t the end of the story: a new plan is under discussion, relating specifically to infrastructure projects, which could reach USD 2.250 trillion spread over eight years. At the moment, this expenditure can be easily financed by debt, which is then largely being bought up by the Fed. But this mechanism cannot be extended indefinitely. If the US economy picks up, in part thanks to this extraordinary stimulus, it will no longer be legitimate for the Fed to purchase so much debt. That leaves little choice: if we rule out recourse to raging inflation, which nobody wants, the only option is to raise taxes.
Most countries are faced with a wall of debt, which will work to the advantage of the US: they can count on broad global cooperation in raising taxes. Of course, France and Germany are their main supporters.
Tech- and healthcare sectors would be hardest hit
What are the consequences for financial markets? Generally speaking, US companies could become a little less profitable after taxes. That could affect their stock prices. But the impact will not be the same for all companies: according to a Bloomberg study, companies in the technology and health care sectors will take the biggest hit, whereas energy, materials and consumer staples will be least affected. Large caps generally have higher earnings abroad than small caps and will therefore see a greater impact, particularly as the five companies with the largest market caps are related to the technology sector.
At the same time, if government receives more funding from taxation, it may have to issue less debt, which could slow interest rate rises. This is more favourable for growth stocks, such as those in the technology sector. This could balance up the impact on different types of securities.
Return to more sustainable financing
The effects of this change will thus be far-reaching and are difficult to forecast with any certainty at present. Apart from the main effect: the US government could get back to a more sustainable funding model, with less dependence on debt. And not just the US, but large parts of the world that will follow suit: the war on tax cuts should have less of a destabilising effect on the countries that cooperate. Of course, resistance will be fierce in some quarters, but much will depend on size: if it is just a few tax havens, that won’t be an issue. If it is China, that would be quite a different matter. The US cannot let China become a corporate tax haven. Luckily for them, there is no clear risk of that today. But in the long-term, who knows?
By Olivier de Berranger, Deputy CEO of LFDE
Final version of 9 April 2021
