August 8, 2022

United States President Joe Biden poses with supporters after touring King Orchards farm in Central Lake, Michigan on July 3, 2021.

Joshua Roberts | Reuters

Almost six months after President Joe Biden took office, Wall Street remains divided over the likelihood and impact of one of the Democrat’s key campaign promises: higher taxes.

While the president and his cabinet have made strides in persuading foreign partners to support a global minimum corporate tax rate, the Biden team seems no closer to passing the sweeping tax reform he promised during his 2020 campaign.

The many components of the Biden tax plan include an increase in the domestic corporate tax rate from 21% to 28% and the highest individual income tax rate to 39.6% from 37%. The White House also plans to raise the capital gains tax rate for those who earn more than $ 1 million a year from the current 20% to 39.6%.

But with the GOP firmly against tax hikes, and with a handful of economists concerned that a tax hike now could jeopardize economic recovery, some say the outlook for the government’s tax plans has grown bleaker in recent months.

The prospects of major tax reform in the near future seem dim, said Tony Fratto, who served as a tax clerk in the George W. Bush administration.

“I don’t want to say that the fight is over yet because I know there are still supporters for it. But I think the fights are tough,” he said on Tuesday morning. “On the corporate side, given the economic situation we were in, you can argue that when there are still many millions of people unemployed relative to pre-Covid, you don’t want to stifle the return to growth and job creation.”

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Although last year’s economic recovery has not yet returned the workforce to its former size, the employment situation was even worse when then-candidate Biden announced his ambitious tax reforms at CNBC in May 2020.

Higher taxes on capital gains and on the rich would not only help fund government incentives, Biden said at the time, but also the growing wealth gap in the U.S. by forcing the rich to pay their fair share.

“My tax policy is based on a simple proposal, which is to stop rewarding wealth and start rewarding work a little,” Biden said on May 22, 2020. “Taxes will rebuild a better economy, stimulate it, a middle class and create jobs, paycheck protection, health care, the confidence to come back. “

BlackRock: Slight tax hike likely

To be fair, the lack of progress on tax reform isn’t necessarily due to a lack of effort by the Biden government.

Any mention of a hike in the domestic corporate tax rate from its current 21% is a non-starter for Republicans and some economists who say it’s still too early in the economic rebound to urge the country’s businesses to send an even bigger chunk of their profits to Uncle Sam .

This opposition poses a significant barrier to the Democrats, who have a slim majority in the House of Representatives and are 50-50 split with the GOP in the Senate.

Despite a $ 1.9 trillion Covid-19 bailout bill, $ 1.2 trillion physical infrastructure plan, and another $ 1.8 trillion proposed for families, childcare, and paid employee vacation programs the Biden government has not yet implemented its tax proposals.

Tax increases are “off the table,” Senator Mitt Romney, a Republican from Utah who was involved in the bipartisan infrastructure talks, told reporters last month. Senator Jon Tester, a Montana Democrat who participated in the negotiations, said at the time that paying for the infrastructure “is probably the hardest part from my point of view.”

BlackRock, the world’s largest wealth manager, told its clients in late June that the Biden White House continues to expect to raise some taxes to offset historic spending levels.

“The direction of travel for corporate taxes is higher even if the outlook is uncertain,” Kurt Reiman, BlackRock’s senior strategist for North America, told CNBC last week. “We believe that the Democrats will use this open window in the summer and fall before running for the mid-term elections to move their legislative agenda forward.”

In particular, BlackRock executives warned that if the proposed corporate tax rate of 28% and a global minimum tax of 21% were introduced, the average earnings per share of the companies in the S&P 500 could fall by as much as 7% in 2022.

Reiman and his colleagues believe that the Democrats are likely to be able to raise tax rates, but that the increases will be more modest than Biden’s initial proposals. For example, they point to Biden’s willingness to consider a more moderate increase in the top tax rate to 25%, as suggested by the important centrist Sen. Joe Manchin, DW.Va.

“These programs have to be funded in part by higher corporate and maybe even individual tax rates if they let the Senate pass as part of reconciliation,” added Reiman.

JPMorgan: Biden can’t deliver

Others are more pessimistic about Biden’s ability to find enough support for higher taxes.

“We don’t think US policy will hurt US stocks in absolute terms as Biden is unlikely to be able to implement some potentially market-unfriendly tax / tech regulation proposals,” said the equity strategy team at JPMorgan told customers on Monday.

“However, in relative terms, investor sentiment could be hurt as some of these policies are headline newsflow risk,” they added.

For Bush-era finance officer Fratto, the tense Republican-Democratic negotiations over paying for infrastructure make almost nonsense considering how cheap it is to get credit.

“Borrowing has been cheap for a long time. It’s extremely cheap now, and it’s not clear if that’s going to change,” he said. “When you’re not under the pressures of ever-increasing debt, the payment arguments get really tough.”

Between the Federal Reserve’s easy monetary policy and robust global demand for US bonds, US bond rates have largely fallen over the past decade. The price of the 10-year government bond, which traded north of 6% in 2000, was last at 1.3% after trading below 1% for much of 2020.

But not only Fratto sees untapped potential in the market for government bonds.

Citigroup strategist Vikram Rai has been touting the appeal of an Obama-era instrument called Build America Bonds for months. These special, taxable, municipal bonds allow states and counties to issue bonds whose interest costs are subsidized by the federal government.

The Obama administration first introduced bonds (known as BABs) in 2009 to fund capital projects and fuel a troubled US economy emerging from the Great Recession.

“The on-paper arguments throughout my career in Washington, dating back to the late 1980s and early 1990s, was this story that was told, we have to pay for it [stimulus]. Otherwise, bond rates will skyrocket or we will get inflation, “Fratto said.

“Whatever the limit that would saturate the market with Treasuries, we didn’t discover it,” he said. “And we seem far from it.”

– CNBC’s Michael Bloom contributed to the coverage.