Former Federal Reserve Chair Janet Yellen
The Biden administration plans to launch a $2.3 trillion infrastructure program, and tax increases on businesses appear to be imperative due to the sheer size of the project and the difficulty of financing it. Goldman Sachs analysts expect that the tax increase may lead to a 9% reduction in earnings per share for S&P 500 companies next year, with the communications services and information technology industries suffering the biggest impact. In addition, another negative effect of the tax increase is that it will put U.S. companies at a competitive disadvantage in the global market.
On March 31, the Biden administration officially unveiled its $2.3 trillion infrastructure plan and proposed to finance the infrastructure by raising corporate taxes, increasing the corporate income tax from 21% to 28%, and raising the minimum tax rate on U.S. companies’ overseas profits to 21% from the current 10.5%.
Goldman Sachs Group estimates that the plan to raise corporate taxes could reduce the profits of S&P 500 component companies by 9% next year. Communications services and information technology industries may also be the biggest losers of the tax increase plan, because these industries overseas business must pay a higher portion of the tax. Goldman Sachs expects that the impact of corporate tax and global tax rate increases, the two industries will reduce earnings per share by about 10% next year.
Technology stocks have been the main force supporting the rise of U.S. stocks. Bank of America (BofA) U.S. stocks quantitative strategy director Subramanian (Savita Subramanian) said that technology stocks have been under pressure this year because of rising borrowing costs, so that the company’s future cash flow value is reduced, the value of future cash flow is an important reason to support the valuation of technology stocks with high stock prices.
Subramanian said that the market risk of these industries will be higher than ever.
However, investment firm Boston Partners global market research director Mullaney (Mike Mullaney) said the market has so far apparently not taken the impact of the tax increase into account.
He said, “Tax rates will go up, we just don’t know the extent of future tax increases.”
In addition, if only the U.S. raises multinational tax rates, the competitive advantage of U.S. multinationals over multinationals in other countries will be eroded, and not only that, but U.S.-based multinationals may also use global tax pits to shift profits across borders.
According to the Wall Street Journal and other U.S. media reports, on April 5, U.S. Treasury Secretary Yellen said that countries wildly cut corporate tax rates to attract multinational companies to move in, should end the corporate tax rate “30-year race to the bottom” (30-year race to the bottom).
She said the Biden administration will work with other advanced countries in the G20 to develop a minimum corporate tax rate.
This is Yellen’s most high-profile foreign affairs talk to date, released at a sensitive time, just before the World Bank and the International Monetary Fund (IMF) meet this week. Yellen called on countries to set a uniform corporate tax minimum rate at this point in time, in large part to seek global assistance for the Biden administration’s major infrastructure program.
According to the report, if the global implementation of a uniform minimum tax rate, the bottom-up competition in taxation will be limited to a certain extent, also to protect the competitiveness of U.S. multinational companies; however, if the United States fails to successfully promote the global corporate tax system, Biden will raise taxes, based on U.S. companies will be at a disadvantage, overseas companies are expected to be far more profitable than U.S. companies.
Manal Corwin, head of KPMG’s National Tax Office in Washington, said, “With the U.S. implementing such a high offshore tax rate, aligning with the global minimum tax rate would ease the pressure on the (U.S. company) system.”
Data from the U.S. Tax Policy Center (TPC) shows that in 2020, the top U.S. corporate income tax rate is 25.8 percent, ranking 11th among 36 Organization for Economic Cooperation and Development (OECD) countries and sixth among the Group of Seven (G7).
The Financial Times quoted Senator Pat Toomey, Republican of Pennsylvania, as saying, “Treasury Secretary Yellen effectively acknowledged that Biden’s corporate tax hike would undermine the competitiveness of American workers and businesses, which is why Treasury Secretary Yellen pleaded with other developed countries to raise taxes as well.”
Research by UC Berkeley economist Gabriel Zucman and others shows that in 2017, the most recent year for which data are available, about 40 percent (more than $700 billion) of the profits earned by multinational corporations worldwide were shifted to “tax havens.”
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