US Stocks Hold Gains As Yellen's Global Minimum Tax Gains Support From EU, IMF

WHO PAYS THE BILL?

US stock markets have started April and 2Q’21 on strong footing, bolstered by a litany of factors beyond the improving US economy: the Biden administration’s fiscal stimulus plan; the Federal Reserve’s ongoing regime of low interest rates and cheap liquidity; and strong seasonal factors.

But just as the economic party is getting started, US fiscal authorities are beginning to think about moderating the punchbowl to, in a sense, help pay for the cost of the party: by raising corporate taxes and for income earners making $400,000 or more per year. Markets care far more about the former of the two, insofar as increased corporate tax rates can have a negative impact on the bottom line in the form of reduced earnings.

WHAT CHANGED IN RECENT YEARS?

In recent years, under the Trump administration and a Republican majority in the House and the Senate, the 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35% to 21% in hopes of spurring economic growth. One of the secondary objectives of the legislation was to increase American competitiveness as a location for corporations to domicile their tax base after a slew of American-founded companies redomiciled abroad vis-à-vis “tax inversions,” e.g. the merger of Pfizer and Allergen. In other words, a secondary goal was to stop the “race to the bottom” by getting closer to the bottom itself.

Now, under the Biden administration and a Democratic majority in the House and the Senate, policymakers in Washington, D.C. are seeking to raise the corporate tax rate from 21%. Where to though? President Joe Biden himself has floated a 28% corporate tax rate. The influential West Virginian Senator Joe Manchin has suggested 25%. However, all of these initial discussion may be dead-ends if US Treasury Secretary has her way.

GLOBAL AVERAGE CORPORATE TAX RATE (1947 TO 2020) (CHART 1)

US Stocks Hold Gains as Yellen's Global Minimum Tax Gains Support from EU, IMF

EU, IMF, OECD, YELLEN IN AGREEMENT

For years, the OECD has led a global effort (more than 140 countries in synchrony) to end the "race to the bottom" in corporate tax rates, with a recent push to have a framework in place sometime in 2021. This context makes what happened at the start of this week all the more interesting.

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