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Expert Opinions

Investors weigh tax implications of Biden’s $4 trillion recovery package

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The focus of financial markets will shift in the coming months from preoccupations about inflation, jobs and salaries, to the tax implications of the US Administration’s ambitious $4 trillion economic recovery package. Lyxor’s Global Head of Market Research Jeanne Asseraf-Bitton explores the implications for corporate profits and markets.

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Investors weigh tax implications of Biden’s 4 trillion recovery package

What are the political prospects for this huge recovery package?  
The American Jobs Plan, a $2.3 trillion package largely focused on infrastructure and jobs investment, and the American Families Plan, a $1.8 trillion plan to reinvigorate American households, make up Joe Biden’s ambitious $4 trillion economic recovery package.
The size of the package may well be watered down in negotiations due to take place over the summer, as Democrats and Republicans face off over tax rises that will rile American conservatives.  
We can expect a vote in September at the earliest, with a progressive rollout likely from the beginning of 2022. 
Will the Jobs Plan make a dent on corporate profits? 
The American Jobs Plan would be largely financed by a proposed increase in the corporate tax rate from its current 21% to 28%. It would be supplemented by a tougher tax regime on US multinationals’ incomes abroad. 
If approved, the corporate tax rise would put the US at the top of OECD countries in terms of tax levels, and this seems unlikely. We believe it’s far more likely, given the negotiations, that it won’t rise above 25%.
The Americans are negotiating with the OECD to make sure Multinationals don’t escape taxes through tax havens. There’s a big will for a fairer tax regime at home and abroad, and to clamp down on tax avoidance.
Even under the hypothesis that corporate taxes will rise to 25%, rather than 28%, in the next two years, the hit on corporate profits in 2022 is likely to be around 4%. If imposed immediately, the impact on profits would be 8%. This is not a negligible impact compared to the consensus estimate for EPS growth that stands at 12% for 2022.
The impact on growth and inflation will much depend on the macro backdrop at the time of implementation, and on how quickly taxes will be hiked. The Fed will likely lean on the easing side if higher taxes were to threaten growth prospects.
Is the US likely to raise capital gains tax to 40%? 
The $1.8 trillion families plan, which would roll out over 10 years, will be financed by increases to the top marginal tax rate for high-income individuals and families, returning it to its 39.6%, pre-2017 level.
Other measures include greater enforcement from the Internal Revenue Service, a reform in estate taxes, and improvements to the efficiency of the tax system.
But what’s worrying the markets is the proposal to raise the long-term capital gains rate for those earning over $1 million from the current 20% to 40%. This seems very high to us, and we believe that negotiations will bring it to around 30%, which is about the level in France.
We believe markets are pricing a more moderate outcome than suggested by Biden’s plan and may not react much if negotiations end up close to the 30% level. Congress passing a bill with a higher tax would be detrimental to markets.