The Dealing Begins; $3.5 Trillion Bill Will Get Smaller
Author: Greg Valliere
September 13, 2021
HOUSE DEMOCRATS have already begun to negotiate with themselves on the $3.5 trillion social spending bill — which almost certainly will get a haircut, as we have predicted for months.
THE EMERGING BOTTOM LINE is that tax hikes will be less onerous for business than favored by progressive Democrats, who face just enough opposition from moderate Democrats to make this a roughly $2 trillion bill, not a $3.5 trillion package.
ALL EYES ON THE HOUSE WAYS AND MEANS COMMITTEE: Its chairman, Richard Neal, and many key members have been tight-lipped on their tax proposals; Neal believes that if his proposals are in public for weeks, they will attract incoming fire.
NEAL CIRCULATED A DRAFT YESTERDAY that included some significant changes, however. He would raise $2.9 trillion in taxes, which could leave a $600 billion hole to fill — largely paid for by a vague “dynamic scoring” provision, plus drug price controls and stronger IRS enforcement. But he may need even more money, since he didn’t include liberalization of the state and local tax (SALT) break or a permanent extension of the child tax credit.
SIGNIFICANTLY, NEAL WOULD LOWER Biden’s proposed 28% top corporate rate proposal to 26.5%, with lower rates for small businesses. This is the first haircut on corporate rates, but Manchin probably will get more — a 25% top rate. A 39% top individual tax rate is likely to prevail.
RESPONDING TO INTENSE PRESSURE FROM INVESTORS, the Neal proposal would raise the top capital gains rate only to 25%, up from the current rate of 20%. Biden wanted to roughly double the cap gains rate.
THE NEAL PLAN CLEARLY goes after the super-rich and big corporations. There would be a 3% surtax on high-income individuals who make more than $5 million a year, and only firms earning more than $5 million annually would be subject to the top corporate rate. As expected, there are sharp limits on U.S. firms’ deductions of taxes they can claim on foreign earnings.
THESE PROPOSALS ASSUME that the House can pass a bill by Sept. 27, the goal set by House Speaker Nancy Pelosi. Not only is that unlikely, a bigger issue is whether Manchin and a handful of moderate Democrats could scuttle the entire package.
OUR ODDS ARE 60-40 that Congress will pass the initial $1 trillion infrastructure bill and a slimmed-down second package of social spending and tax hikes. But as Bernie Sanders made clear yesterday, a skinny second bill could prompt progressives to reject everything. Gridlock is a real threat.
THUS NEAL IS WORKING ON A NARRATIVE that the tax hikes will largely hit the very wealthy and huge corporations, a shrewd political move. But Manchin and others dislike many of the provisions and — more importantly — they object to the enormous price tag, which they say will drive inflation higher.
THERE’S MORE WORK TO DO before all the Democratic factions are on board, complicated by an issue that will compete for attention — raising the debt ceiling before a crisis erupts in about a month.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2023 AGF Management Limited. All rights reserved.