A Focus on China Last Night
IT’S VIRTUALLY CERTAIN that the huge tax hikes proposed last night by President Biden will get watered down, as Democrats express uneasiness and Republicans are unanimous in opposing anything that could be a serious impediment for the markets.
THUS IT APPEARS THAT EQUITIES — already enjoying great corporate earnings and a super-accommodative Federal Reserve — are headed for another plus: a final tax bill that won’t be particularly onerous. The outlook isn’t as rosy for the fixed income markets, which are facing huge new spending, much of which may not be paid for.
THE TIPOFF ON TAXES COMES, IRONICALLY, FROM DEMOCRATS who are opposed to the magnitude of the capital gains tax hike. Moderate Democrats like Joe Manchin were expected to resist big tax hikes, but some new names are emerging — including Sens. Bob Menendez and Mark Warner, both members of the tax-writing Finance Committee.
OUR SOURCES ON CAPITOL HILL think it’s unlikely that a new capital gains tax rate would exceed 30%, so we reiterate our mantra: The Biden proposals will get a significant haircut. His spending will get scaled back, and there will be a reduction of his proposed estate tax hikes, his capital gains tax hikes, and his corporate tax hikes.
YES, THREE WILL BE SOME TAX INCREASES — the top personal rate may rise from 37% to 39.6%, and the top corporate rate probably will rise from 21% to 25%, along with a minimum corporate tax rate and more revenues from abroad. But this may already be factored into the markets — and may be overshadowed by blowout earnings as the U.S. recovers quickly from the pandemic.
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BIDEN AND DONALD TRUMP don’t agree on much, but they both realize that China is a deadly serious competitor. The new president spent a lot of time on China last night, vowing to compete with Beijing everywhere from the South China Sea to factories in Pittsburgh.
SOUNDING LIKE TRUMP, Biden said “America will stand up to unfair trade practices that undercut American workers and American industries, like subsidies to state-owned enterprises and the theft of American technology and intellectual property.”
THE TOUGH RHETORIC AGAINST CHINA wasn’t surprising because most Democrats see China as a rival of U.S. labor, they oppose Beijing’s treatment of dissidents, and there’s widespread anger in Washington over fresh reports of China’s hacking of U.S. companies. Legislation to fund U.S. manufacturing to compete with China is likely to pass this year.
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OVERALL, WE GIVE BIDEN A B-PLUS FOR THE SPEECH, which was a well-written middle class manifesto — delivered in a conversational, low-keyed style that obviously was designed to contrast Biden with Trump.
BUT ONE SPEECH WON’T BE ENOUGH to win over any Republicans to Biden’s agenda; even GOP Sens. Susan Collins and Lisa Murkowski are unlikely to support him. Democrats probably will have to resort to a reconciliation tactic to pass a bill in a 50-50 tie, assuming all Democrats go along (which is far from certain).
EVEN IF BIDEN GETS LESS THAN HE WANTS, he will make an enormous difference on regulatory policy, aiming at financial services, Big Tech, health care providers, fossil fuels, etc. This could become a greater irritant for investors than a modest tax hike.
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