Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Higher taxes are coming and for markets, that could be a good thing

EconomySep 21, 2021 01:35AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: Euro and U.S. dollar banknotes are seen in this picture illustration taken in Prague January 23, 2013. REUTERS/David W Cerny

By Dhara Ranasinghe and Sujata Rao

LONDON (Reuters) -And so it begins: Taxes in the world's wealthiest countries are rising. Inevitable perhaps given the unprecedented COVID-era debt surge and, according to some investors, even a good thing if it helps close the wealth gaps the pandemic has exacerbated.

Tax rises grabbed headlines recently when Britain, last year's biggest major borrower relative to gross domestic product (GDP), upped taxes on workers and employers, potentially raising 12 billion pounds ($17 billion) a year.

U.S. markets are edgy too after Democrats proposed to raise tax rates on companies and those on annual incomes above $400,000.

Taxing higher incomes won't be welcomed by rich individuals while several investment banks have cut Wall Street forecasts for 2022. Goldman Sachs (NYSE:GS) reckons S&P 500 earnings-per-share would be 5% lower if corporate taxes go to the 25% proposed.

Yet, most investors and economists appear unperturbed and some even say targeted tax hikes that reduce burgeoning inequality will benefit markets in the longer-term.

Moreover, a return to the "austerity" policies adopted after the 2008-9 crisis is unlikely, given sluggish growth, rising poverty and socio-economic upheavals such as Britain's 2016 Brexit vote are often blamed on those belt-tightening years.

So far, investors note, efforts to raise personal taxes in major Western economies have been modest and won't necessarily knock economic growth and equities markets.

Britain's 1.25 percentage-point National Insurance increase for instance, amounts to an estimated half a percent of GDP. And a dividend tax hike will deliver a mere 100 pound annual hit to people earning 10,000 pounds a year in dividends, brokerage AJ Bell calculates.

For bond markets, even modest debt-reduction measures, could be positive.

Kleinwort Hambros Chief Investment Officer Fahad Kamal sees no political appetite to slash pandemic-era spending programmes which "kept the lights on and backstopped everyone in the economy who needed help."

Yet "the fact that there is clearly some plan to address the huge increase in debt that we've had over the last year-and-a-half is a good thing," he said of the UK tax hike.

Efforts to start paying down debt were "part of the rationale" for stabilising the negative outlook on Britain's AA- credit rating this year, Michele Napolitano, head of Western European Sovereigns at Fitch Ratings, said.

"What we are seeing across Western Europe...shows there is not a willingness to keep public debt levels rising forever," he recently told a conference.

DEBT MOUNTAIN

It's easy to see why governments are worried.

Global indebtedness, including government, household and corporate and bank debt, sits at a record of nearly $300 trillion, the Institute of International Finance estimates, with $4.8 trillion added in the second quarter of 2021.

Debt rose $9.3 trillion in 2020, more than the eight previous years of borrowing combined, according to a Janus Henderson study.

But there is little chance austerity will take hold as it did in Europe after 2009; capitalising on record low interest rates and central banks' money-printing programmes, governments continue to spend.

European Union rules capping government borrowing remain suspended while mammoth U.S. spending proposals and poverty-reduction initiatives such as a $1.8 trillion American Families Plan are proceeding full-tilt.

The past year showed in fact how effective targeted spending can be; pandemic aid programmes cut U.S. poverty rates by almost half compared to 2018 levels, an Urban Institute study found.

The crisis also shone a light on the wealth gap -- figures quoted by Oxfam show the world's billionaires got $3.9 trillion richer between March and December 2020.

For policymakers seeking to raise funds, this wealth is low hanging fruit, analysts say, noting the Biden administration's proposals and China's "shared prosperity" drive.

"Given the role central banks play and where interest rates are, there is no real pressure from markets for governments to pay down debt. It's more because of inequality," said Kiran Ganesh, head of multi asset at UBS Global Wealth Management, predicting wealth redistribution to be a theme for coming years.

REDISTRIBUTION

If inequality has dragged on growth, as organisations such as the IMF have repeatedly warned, redistribution should support economies and in turn, stock markets.

According to one Congressional estimate, tax code changes sought by Democrats would cut tax bills for Americans earning less than $200,000 annually.

"One outcome is that wages for less well-paid will go up because the better-off pay more tax and people who get more money in their pockets have a propensity to spend," said Tom O'Hara, a portfolio manager at Janus Henderson Investors.

A study presented at this year's U.S. Jackson Hole conference posited that income inequality exacerbated downward pressure on bond yields, since the wealthy usually save a bigger portion of their income.

"It's easy to see tax increases as a short term negative for investors but if you see people not on higher incomes suddenly get more income it can be positive for the economy and markets," said UBS's Ganesh.

Higher taxes are coming and for markets, that could be a good thing
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (4)
Waldo Chery
Waldo Chery Sep 21, 2021 2:30AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
waldochery
Vlad Lozovskiy
Vlad Lozovskiy Sep 20, 2021 11:52AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
That is pretty Mo ro nic statement.  That it is good for market. No it is not.
Djwhite idama
Djwhite idama Sep 20, 2021 11:50AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Connecticut Yankee
A_Jaundiced_Eye Sep 20, 2021 10:43AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
ANYTHING that increases the power of Government is a bad thing, no matter how much bread and butter people get from it.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email