Business & Investment

Wall Street is waiting for Biden’s infrastructure plans, but may like new taxes

President Joe Biden will ask questions during the first formal press conference in the East Room of the White House in Washington, USA, on March 25, 2021.

Rear Millis | Reuters

Wall Street is waiting for details President Joe Biden’s Infrastructure Plan, But it may not like the way Democrats want to pay for it.

Biden The first part of his ambitious infrastructure planning In Pittsburgh on Wednesday. The overall plan is expected to include funding for traditional infrastructure for roads, railroads and bridges, as well as spending for facilitation. Low carbon future Through electric vehicles, advanced batteries, and more efficient buildings.

Political strategists also say they expect to see a list of proposed tax increases for individuals and businesses at some point, some overturning the 2017 tax cuts.

The first tax increase is widely expected to roll out next year, but some say that capital gains tax increases for the wealthiest Americans could begin shortly.

“The market isn’t ready to respond. I’ve been completely bullish for a year and now the flag is up,” said Dan Clifton, head of policy research at Strategas. Clifton said he didn’t expect all proposals to pass, but said the wealthiest taxpayers would be taxed higher and businesses would pay more on US and international earnings.

The hope is that the 10-year plan will not only boost the economy through infrastructure and green spending, but also provide programs to support families such as free community colleges and universal kindergartens.

“I’m worried that some of these tax increases will need to come into effect soon, not 2022. Investors are told that the four months of 2021 will be 20%, 2022 1 Investors will realize their profits in the four months before the tax rises, saying it will be 28% on the 1st of the month. “

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According to strategists, some of the proposals that could be adopted include raising the corporate tax rate by a few percent and raising taxes on overseas businesses. Income tax and capital gains may increase for wealthy individuals.

Dividends may also be taxed at a new higher tax rate on the same group. Inheritance tax is also subject to change.

Private-equity and hedge fund partners, in particular, will face potential changes in how capital gains are taxed on the wealthy. Partners who make a profit on the fund’s personal assets or are paid carry-forward interest are taxed on their earnings at a capital gains rate or up to 20%.

Biden proposed closing that loophole by taxing the capital gains of couples who earn more than $ 1 million at normal income rates.

“It’s actually part of tax law that deals with the interests of partnerships,” said Ed Mills, a Washington policy analyst at Raymond James. The threshold was intended to target wealthy partnerships rather than small ones. “There is a big difference between the two legal partnerships and a global private-equity partner.”

Biden says taxpayers who pay less than $ 400,000 a year will not be taxed.

After the compromise, Clifton said the capital gains tax could be 28% for wealthy individuals, not the expected maximum rate of 39.6% for recurring profits. The highest tax rate was at that level before the Republican Party was tax-reduced in 2017.

“In effect, married people over $ 400,000 who are currently paying either 33% or 37% are pushed into 35% or 39.6% brackets (the upper bracket is much lower than current law.” ”, Says Andy Laperriere. Of policy at the corner stone macro.

Higher tax than “not discounted”

For businesses, some strategists have stated that Biden’s proposed 28% tax on corporate profits could be compromised, eventually reaching around 25%. Corporate tax rates have been reduced from 35% in 2017 to 21%, but Mr. Clifton said there are more deductions at higher tax rates and they are not expected to return.

“In our view, the tax increase is probably not actually discounted,” La Perriere said. He said some details of higher taxes may begin to come out. “We’re going to get some of that tomorrow. It’s not clear how much … we’ll see what we get in his speech.”

The Biden administration plans to announce a small budget later this week, but the full range of its tax system could still be weeks ahead.

Sam Stovall, CFRA’s Chief Investment Strategist, said: He said it could be a problem if the Democrats tax dividends as recurring profit. This has so far been seen as unlikely for the majority of investors.

“I, [corporate] Tax law affects profits. It can be calculated in the end, but I think the problem is enough change to change the investor’s decision to buy a particular stock or generally buy a stock. “He said.

Stovall said earnings forecasts for 2022 are rising, which could help mitigate the impact of tax increases.

“Investors may pause, but they are expected to show fairly strong growth in the second half, so they may wonder if they are underestimating growth,” he said.

Winners and losers

Clifton said infrastructure plans, coupled with corporate tax hikes, would create winners and losers for businesses.A few Enterprises will benefit from infrastructure spendingnd pays a slightly higher tax, while others may not benefit much from it, but still pay a higher tax.

He said the tech sector is likely to be hit hardest by tax increases for overseas operations.

“In 2017, we allowed businesses to return foreign cash to the United States, and businesses are taking their cash home,” Clifton said. However, he said another tax was levied on overseas businesses.

“It makes a formula about how much intellectual property you have abroad and puts taxes on it,” he said. The tax is currently 10% and Biden has proposed raising it to 21%, but Clifton said there would probably be a compromise at about 15%.

“It’s $ 800 billion in 10 years … it’s a monster,” he said.

Mr Clifton said there would be a tax increase for companies that the Democratic Party could cancel. Under the 2017 tax law, R & D expenses must be amortized over a five-year period starting in 2022. This can be eliminated and companies can continue to amortize these costs.

Overall, Clifton expects the corporate tax bill to increase by $ 120 billion in 2022 if these changes are made starting January 1.

“I want to own a company that makes money for infrastructure, a company that makes money for green energy and broadband,” Clifton said. “I think some industries will benefit from infrastructure funding. Some materials will benefit.”

Transportation should also increase. “Public utilities will be hit by corporate tax rates. They will also be hit by obligations on the grid,” he said.

Some companies may benefit from it Nextera, He said.

He said to companies that are in a position to make a profit Johnson Controls, Eaton Or Career, Or a building materials company like Lennox..

Mr Clifton said tax increases could be phased in, or slightly likely to come into effect early when the bill is approved. Strategists don’t think so, but that would mean companies pay higher tax rates for parts of the year.

Democrats are expected to split their infrastructure plans in two and submit bills with traditional infrastructure spending that could appeal to Republicans.

Within a few weeks, another aspect of the plan is expected to become apparent, which could include health care and child care reforms, as well as tax increases. The latter must be approved through a settlement. In other words, it could be passed by a majority of the Senate instead of 60 votes.

“I think we need to anticipate a tax increase if we have an infrastructure bill, at least part of it will be paid,” Mills said. “The most likely corporate tax hike is a 28% tax rate, after which international law will change significantly.”

“Looking at the international code, it was probably part of a larger change under the Trump administration … the threshold of parliamentary suffering when taxes are levied on international activities and on members. There are few, “he added.

Regardless of how it is proposed, Biden’s plan to “build better” is expected to move as fast as the $ 1.9 trillion Covid bailout plan, which was approved last month and only endorsed by the Democratic Party. not.

According to Clifton, some members of parliament SALT tax deductions that limit the amount of state and local taxes It can be deducted for $ 10,000. This limit was imposed by the 2017 tax law and has hit taxpayers in high-tax states such as California, New York and New Jersey.

Within the Democratic Party, there is also disagreement over what should be included in spending plans and what should be taxed. Some Democrats support wealth taxes.

Senator Bernie Sanders, I-Vt. Last week, a bill was submitted to return the corporate tax rate to 35% before 2017.

The Sanders bill also included an inheritance tax starting with a 45% tax on real estate worth $ 3.5 million to $ 10 million. For real estate worth over $ 1 billion, it could be as high as 65%.

By 2025, the 2017 Tax Amendment Act doubled the inheritance tax exemption from $ 5.5 million to $ 11 million for singles and $ 11 million to $ 22 million for couples. One filer was $ 3.5 million, 45% compared to the current 40%.

Tax review is also expected Unleash opposition from advocates across the political spectrum.

“It’s awkward from a process point of view, it’s awkward from a political point of view,” said Michael Puriese, an economist at Wells Fargo. “It will be a much longer and bumpy road. There is no room for error in either direction.”

“I’ve heard that medium-sized members are a little squeaky about how a bit a package is,” he added.

Pugliese said more progressive members were concerned that the stimulus did not raise the minimum wage to $ 15 per hour.

–CNBC’s Michael Bloom contributed to this story

Wall Street is waiting for Biden’s infrastructure plans, but may like new taxes Wall Street is waiting for Biden’s infrastructure plans, but may like new taxes

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