- Stock market starts to worry more about higher corporate taxes
- U.S. unemployment claims expected to show a continued improvement in U.S. labor market
Stock market starts to worry more about higher corporate taxes — The U.S. stock market has known since last November when Joe Biden won the presidential race that corporate taxes would be going up. Mr. Biden’s campaign platform was to raise the corporate tax rate to 28% from 21%.
However, the stock market is starting to get more worried about higher corporate taxes because the Biden administration is getting even more aggressive on corporate taxes by proposing a substantial minimum tax on corporate profits and is also organizing a global effort to impose a minimum corporate tax. That means that corporate taxes may be going up overseas as well, where U.S.-based corporations earn substantial profits.
The markets were a bit taken aback on Wednesday when Treasury Secretary Yellen released details of the corporate tax hike plan that she said would bring in $2.5 trillion in increased corporate taxes over the next 15 years, enough to pay for President Biden’s $2.25 trillion 8-year infrastructure program.
The Treasury’s plan made clear that the Biden Administration wants to raise the minimum tax on foreign corporate profits, and also impose a minimum tax on domestic profits reported by corporations.
The Biden Administration is also pushing for global cooperation on imposing a minimum corporate tax rate so that countries are not competing against each other to see who can offer corporations the lowest tax rates. At first blush, it might appear that a cooperative effort to impose a minimum tax would get little traction because there are a number of countries that stake their global competitiveness on having low corporate taxes, such as Ireland.
However, there was some positive feedback from overseas yesterday on a minimum global corporate tax. G-20 finance chiefs on Wednesday pledged to reach a consensus on a digital tax and a minimum corporate tax by the middle of this year. Ms. Yellen last week laid out a plan for a 21% minimum global corporate tax, which would be much higher than recent global discussions at the OECD about a 12.5% tax level.
French Finance Minister Le Maire yesterday said that France is open to a higher tax rate than 12.5% and that France is weighing proposals from the U.S. on how to handle taxation of digital firms.
Mr. Le Maire added, “We are not far from an agreement within the OECD. There is a unique window of opportunity to have a new international taxation system which would be more efficient and fairer.”
Goldman Sachs last month released a report that said that the Biden corporate tax hike plan could cut S&P 500 profits by as much as 9% in 2022 if the plan is fully implemented, according to reporting by Bloomberg.
There is basically a one-to-one relationship between stock prices and corporate earnings, meaning that a cut in corporate profits by -9% implies a -9% drop in stock prices, assuming an unchanged price/earnings ratio. Of course, the markets have already partially discounted higher corporate taxes, meaning that stock prices are not likely to drop by the full amount of the earnings cut when the tax hike is passed.
While the markets are worried about worst-case scenarios, there is no assurance that President Biden will fully get his way on higher corporate taxes. Democratic Senator Manchin has already said that he would only support a hike in the corporate tax rate to 25% rather than to 28%. Mr. Manchin said there were other Democratic Senators who were also concerned about raising the corporate tax as high as 28%.
The median corporate tax for the G-20 countries is 24%. If the U.S. were to raise its corporate tax to 28% from 21%, the U.S. would become a less attractive place to do business and there might be a drop in foreign investment in the U.S. and an increase in investment outflows. That possibility is driving Treasury Secretary Yellen’s quest for a minimum global corporate tax to reduce tax competition from other countries.
U.S. unemployment claims expected to show a continued improvement in U.S. labor market — Today’s weekly unemployment claims report is expected to show a continued slow improvement in the U.S. labor market. The consensus is for today’s initial claims report to show a decline of -39,000 to 680,000, reversing part of last week’s +61,000 rise to 719,000. Meanwhile, today’s continuing claims report is expected to show a -156,000 decline to 3.638 million, adding to last week’s -46,000 decline to 3.794 million.
There are still many more people on the unemployment rolls than before the pandemic. From February’s pre-pandemic levels, initial claims are still up by +503,000, and continuing claims are up by 2.1 million.
There was at least some good progress on job creation in last Friday’s unemployment report. March payrolls rose sharply by +916,000, which was far above market expectations of +650,000. Payrolls have now grown by a monthly average of +692,000 over the past three months (Jan-March), which bodes well for getting the labor market back to pre-pandemic levels by next year or 2023. However, payrolls still have to rise by another 8.4 million jobs to get back to the pre-pandemic record seen in February 2020.
