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How Biden’s Tax Plan Undercuts His Agenda — And The S&P 500

The math behind President Biden’s tax hikes needed to fund his big infrastructure and social spending plans just got even trickier. On Thursday, the White House said that fewer than 1% of tax filers — couples with adjusted gross income of at least $509,300 and singles earning $452,700 — would pay even a dollar more under the Biden tax plan.




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Previously, the White House had set a $400,000 income threshold for the Biden tax hikes, but hadn’t ruled out applying a $200,000 floor for single taxpayers.

Biden’s pledge to shield the “middle class” from tax hikes may make political sense. Targeting the top 1% polls well. Yet piling the burden of Biden’s hefty $4.5-trillion spending increase on just a sliver of taxpayers is easier said than done. Key lawmakers have balked at the relatively high marginal tax rates his plan entails.

The Biden tax hikes would push U.S. corporate tax rates to higher than those of major trading partners, while the wealthiest 0.1% could pay more than 50% of their income in taxes. That could take a toll on the S&P 500 and broader stock market.

The $400,000 income floor for Biden tax hikes places 75% of the income-tax base off limits, Urban Institute fellow Len Burman says. That “could hamstring the president’s ambitious domestic agenda,” he wrote on the Tax Policy Center blog in March. So far that prediction seems on target.

Biden Tax Hikes Aim At Wall Street, S&P 500

Still, first-term presidents whose party controls Congress tend to get most of what they want. Presidents Trump, Obama, George W. Bush and Clinton all did, and Biden very well may also. If he does, the S&P 500 may take a bigger hit than expected. In giving nearly all taxpayers a pass, Biden appears to have settled on Wall Street as his principal target.

“It is time for corporate America and the wealthiest 1% of Americans to just begin to pay their fair share,” Biden said Wednesday, addressing a joint session of Congress.

“We’re going to reward work, not just wealth,” he said, sketching out his $1.8-trillion American Families Plan. It would offer up to 12 weeks of paid family and medical leave. Washington would join with states to offer two free years each of preschool and community college. Biden also proposed keeping a more generous $3,000-$3,600 refundable child tax credit that Democrats beefed up in March. Bigger Affordable Care Act subsidies for buying health insurance also would continue.

That spending would come on top of the Democrats’ $2.65-trillion American Jobs Plan. That has $620 billion for roads, bridges, public transit and electric-vehicle incentives. Another $650 billion would go toward affordable housing, broadband, the electric grid and public school buildings. Biden would spend $500 billion on the domestic manufacturing sector, with a focus on the chip industry, green manufacturing and R&D. The plan adds $400 billion apiece for clean-energy tax credits and the in-home care sector, boosting pay for caregivers.


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Biden Tax Hikes Face Friendly Fire

Yet while Democrats seem broadly united behind Biden’s vision, they appear to lack a clear path for financing such a major expansion of government.

Sen. Joe Manchin, D-W.Va., and some colleagues have given a stiff arm to Biden’s proposed 28% corporate tax rate, citing concerns about U.S. competitiveness. “We have to be competitive, and we’re not going to throw caution to the wind,” Manchin told a home-state interviewer on April 5.

Biden’s proposal to nearly double the top tax rate on long-term capital gains to 43.4%, easily the highest since the 1920s, is also facing pushback among senators.

Meanwhile, 20 House Democrats from high-tax states have warned that they won’t support any income-tax hikes unless the Biden tax plan restores the deduction for state and local taxes (SALT) which was gutted in the 2017 GOP tax package. Otherwise Biden’s plan to raise the top federal income tax rate to 39.6% from 37% would result in top marginal income-tax rates north of 50% in states like California and New York.


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The Democrats’ Funding Hole

Concern that wealthy taxpayers will bolt from high-tax blue states has only grown amid the Covid-era embrace of remote work. Yet restoring the SALT deduction would cost about $360 billion through 2025, adding to the cost of the Biden plan. Additional tax hikes would be needed to offset that cost.

Hiking the corporate tax rate to 28% from 21% would raise $900 billion over a decade, a Penn Wharton budget analysis finds. That suggests holding the increase at 25% could open up a funding hole of about $385 billion over the first decade, and much more over the 15-year time frame Biden proposes to pay for the plan.

The Biden tax hike on dividends and capital gains to a top rate of 43.4% from 23.8%, including a 3.8% Medicare surcharge, would apply to households with at least $1 million in income. That includes just 0.3% of taxpayers. Still, some lawmakers have indicated their discomfort with the plan, which would lift the top tax rate on capital gains as high as 56.7% in California.

The Biden investment tax hikes would raise about $400 billion, the Center for a Responsible Federal Budget estimates. That sum also reflects the White House proposal to tax capital gains on inherited stock. However, Goldman Sachs sees a 28% capital gains rate as likely (or 31.8%, including the 3.8% Medicare surcharge). That could further deepen the Democrats’ funding hole.

Biden Tax Hikes On Corporations

Corporate tax increases are the centerpiece of the Biden tax plan. Penn Wharton estimates the corporate tax provisions could raise over $2 trillion in the first decade.

That dwarfs the $329-billion initial estimate of the 10-year cost of the 2017 business tax cuts, though the revenue loss has been greater than expected. In early 2018, the Congressional Budget Office projected $276 billion in corporate tax revenue in 2019, down from a projection of $344 billion based on prior law. Yet companies paid just $230 billion.

The conservative Tax Foundation says the combined U.S. federal-state corporate tax rate would rise to 32.3% under the Biden tax plan, “higher than every country in the OECD, the G7, and all our major trade partners and competitors including China.” The 2017 tax cuts dropped the combined corporate rate from 39.2% to 25.8%.

The Biden tax hikes on foreign income could pack an even bigger punch than the domestic corporate rate hike, raising $1 trillion in the first decade, Wharton finds. One provision would kill a Trump-era tax reform that encouraged companies like Google to bring home intangible assets, such as patents and copyrights, from tax havens. That would have cost Google $1.45 billion in 2020, IBD has reported.

Overall, the Tax Foundation finds the Biden tax hikes will increase tax liability by 72% for U.S. multinationals. The think tank says tax rates on domestic income would rise more than on foreign income, which could encourage profit shifting out of the U.S.

Treasury Secretary Janet Yellen has fully acknowledged the issue of tax competition. In an April 5 speech, she said the U.S. is working with G20 nations “to agree to a global minimum corporate tax rate that can stop the race to the bottom” for tax rates.

Still, Yellen said that competitiveness goes beyond tax rates. “It’s about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises.”

U.S. Corporate Tax Rate Vs. Other Countries
U.S. (federal and state) 25.8%
U.S. under Biden plan 32.3%
France* 32%
Germany 29.9%
Japan 29.7%
Canada 26.5%
China 25%
U.K. 19%
Ireland 12.5%
* France will cut its corporate rate in 2022 to 25.8%
Sources: OECD, Tax Foundation

How Do U.S. Tax Rates Stack Up?

The current top marginal individual tax rate of 47% in the U.S. is on the low side relative to the rest of the world. In 2019, the U.S. ranked No. 32 out of 41 countries, the Tax Foundation found. Sweden topped the list with a 76% top rate.

Overall tax receipts also are relatively low in the U.S. Federal and local taxes equaled 24.3% of GDP in 2018, OECD data shows. The OECD average was 33.7%.

Where the U.S. stands out is in the share of tax revenue raised from personal income: 41% vs. an OECD average of 24%. Meanwhile, the U.S. gets just 18% of revenue from taxes on goods and services vs. the 32% OECD average, where most countries apply value-added taxes.

The U.S. tax system also stands out for its progressivity. In 2018, after the Trump tax cuts, the top 50% of all taxpayers paid 97% of all federal individual income taxes, while the bottom 50% paid the remaining 3%. However, state income taxes and payroll taxes are much less progressive.


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What’s Next For Biden Agenda?

The next step for the Biden agenda is trying to hammer out an infrastructure deal with Republicans. That’s what Manchin has demanded, and Democrats wouldn’t mind breaking off a piece of their agenda to ease eventual passage of Biden’s program.

Still, prospects for a bipartisan deal don’t look great, with the revenue offsets being the biggest point of contention. GOP senators have pitched a plan that would tax drivers of electric vehicles based on their road usage. That seems contrary to Democrats’ goal of subsidizing electric vehicles. The GOP also wants to divert unspent funds from Covid rescue packages, but the pandemic isn’t over yet.

What about Biden’s new proposal to boost IRS funding by $80 billion over a decade to step up enforcement? The White House says that could net $700 billion. Since it wouldn’t involve tax rate hikes, could that be used to pay for a bipartisan infrastructure bill?

Akin Gump partner Brendan Dunn, a key aide to Sen. Mitch McConnell during the 2017 tax-cut push, doubts it. “A promise to more or less double IRS funding over a 10-year period coupled with promise of more audits and a window into everyone’s cash flow — that doesn’t strike me as a recipe for Republican support,” he told IBD.

While Biden’s agenda would constitute a historic expansion of government, his proposals actually look somewhat restrained. That is, at least compared to what progressives want and his own campaign plan.

He campaigned on a $2-trillion infrastructure plan spent over four years. His $2.7-trillion plan now would cover eight years. His latest American Families Plan is partly notable for what it doesn’t include: student loan forgiveness, Medicare expansion or drug-price negotiation.

Shrinking his agenda to navigate tax-hike concerns might risk setting up Democrats for a tough 2022 election year.

Do Democrats Have A Trick Up Their Sleeve?

In the run-up to the Trump tax cuts in 2017, a 21% corporate tax rate looked out of reach. The breakthrough came when Alaska Sen. Lisa Murkowski said she’d vote to repeal the ObamaCare individual mandate. That provided an extra $300 billion for tax cuts in the first decade and helped meet the test of budget reconciliation: no deficit in the second decade.

Democrats could have their own trick, targeting something that’s far from popular on the left: stock buybacks.

Law professors Daniel Hemel of the University of Chicago and the University of Georgia’s Gregg Polsky have proposed taxing stock buybacks like dividends, which they estimate would raise roughly $500 billion over a decade. That’s at the current 23.8% dividend tax rate. If it were to rise toward the 43.4% proposed by Biden, it could raise substantially more.

Hemel told IBD that the proposal would raise revenue from foreign investors, who own about 40% of U.S. stocks. Non-U.S. residents from countries that don’t have a tax treaty with the U.S. generally pay a 15% tax on dividend income. That likely wouldn’t change even if the tax rate goes up in the U.S., he says. However, the 0.3% of households with at least $1 million in income could face a higher rate under the Biden plan.

“There is interest on the Hill” in the plan, Hemel said. Could legislation be coming? “I’ll let members of Congress make their own news,” he said. Hemel added, “There are a lot of reasons to think this will be politically attractive” on the left.

Still, Hemel doesn’t see “anything evil about buybacks.” He notes that buybacks can send a signal of confidence from management to shareholders, perhaps even more than dividends.

“At a macro level, stock buybacks have certainly been an area of focus on the Democratic side,” said Akin Gump partner Arshi Siddiqui, a former advisor and counsel to House Speaker Nancy Pelosi. While buybacks haven’t yet gained attention as a pay-for, “everything will be on the table as the bill moves through the legislative process.”

What Do The Biden Tax Hikes Mean For The S&P 500?

Wall Street has yet to show much concern about the Biden tax hikes. Stocks took a step back on Friday, but strong earnings this week from the likes of Google (GOOGL) and Facebook (FB) helped power the S&P 500 to record highs above 4200 even after Biden detailed his plan to nearly double the top tax rate on investment gains. The dividend tax rate would rise to the highest level since 1985, when the S&P 500, now near 4200, had yet to crack 300.

Yet it’s probably wrong to draw conclusions from the ongoing stock market rally. Resurgent earnings, vaccine-enabled economic reopening, massive fiscal stimulus and Fed quantitative easing all have fueled stock market momentum. Meanwhile, the Biden tax hikes still have some big hurdles before becoming a clear and present danger.

Wall Street is having trouble believing that anything close to the Biden tax hikes will pass, but that may be wishful thinking. BCA Research this week highlighted the Biden capital gains tax hike as a risk for investors, saying, “In theory, a reduction in expected future investment returns should be compensated for by a lower price today.” But the firm’s political analysts see just 50% odds of the American Families Plan passing before the mid-terms.

UBS Global Wealth Management’s Chief Investment Officer Mark Haefele said what many others have noted: “Historically, increases in capital gains taxes have not harmed stock market performance.”

Still, the S&P 500 index went nowhere in the last nine months of 2012, before the cap gains rate went up.

“Historical experience suggests equity selling later this year ahead of a possible capital gains tax hike,” Goldman Sachs chief equity strategist David Kostin wrote. That selling should reverse in subsequent quarters.

The Tax Policy Center’s Burman wrote that nontaxable investors who don’t face the Biden cap gains tax increase would have incentive to buy if there’s a downdraft as taxable investors sell.

UBS equity strategist Keith Parker wrote on March 9 that he anticipates a 3.6% hit to S&P 500 earnings per share from Biden’s corporate tax hike. That’s less than half the potential 8% hit if the full tax hike were passed.

Rising interest rates as the economy speeds ahead and the Fed begins to taper asset purchases are yet another risk. And don’t discount the possibility that Biden once again surprises Wall Street by signing a massive tax-hike and spending package into law.

Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.

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