The hot topic in Bidenomics is federal jobless benefits, and whether they’re keeping millions of unemployed Americans from looking for work. The latest jobs report, showing 559,000 new jobs created in May, was inconclusive. That’s a quick pace of job growth, but less than economists expected given a rapid snapback in the economy. Both sides of the argument have ammunition.
But this question will sort itself out soon, since federal jobless aid expires in September. If generous unemployment checks are causing a labor shortage, it won’t last long. More important for markets are long-term tax and spending changes President Biden is pushing as part of his effort to transform the economy, and the sleeper news this week was a change in Biden’s tax-hike strategy.
In talks with a key Republican senator, Biden suggested he’d give up his plan to raise the business tax if it would help get a bipartisan infrastructure deal, according to the Washington Post. Biden has proposed a raft of tax hikes to pay for green energy investments, a building boom, and new social-welfare programs. One of those is a hike in the corporate tax rate from 21% to 28%, which Republicans say is a dealbreaker. The 2017 GOP tax-cut law slashed the corporate rate from 35% to 21%, and there’s probably not a single Republican in Congress who'd undo that change, even at a lower rate than it was previously.
Biden’s new idea, apparently, is to raise revenue from another tax hike: A minimum 15% tax on big companies that earn more than $2 billion in profit. That’s aimed at profitable companies that manage to slash or eliminate their federal tax bill because of deductions and loopholes. Biden also wants to beef up enforcement at the Internal Revenue Service, better enabling it to collect billions in taxes that wealthy Americans owe but don’t pay. If Biden ultimately does ditch his corporate tax hike, it’s good news for stock values and investors, even if smaller business tax hikes remain on the table.
These negotiations will take many twists and turns in coming months, with leaks and trial balloons and posturing by both Democrats and Republicans designed to make one side look reasonable and the other side not. Biden’s latest “concession” is probably part of the game, and he hasn’t acknowledged it publicly. Even so, by signaling flexibility on one of his core revenue-raising plans, Biden has lowered the bar in terms of what the ultimate outcome might be. The odds that Congress will raise the corporate tax rate to 28% are probably now less than one in 10.
There are many moving parts in Biden’s legislative plans, and even ardent Congress watchers struggle to keep it all straight. Biden has proposed two giant legislative packages, the American Jobs Plan and the American Families Plan. The AJP is the green energy and infrastructure package. The AFP includes the social welfare reforms. But Congress writes the laws, not the president, and whatever makes it to a vote won’t be as neatly packaged as the two Biden plans. There could be one giant bill including some of both plans, or two bills more or less hewing to Biden’s outlines, or multiple bills that each include pieces of the two plans.
Biden’s wishlist appears to start with a bipartisan infrastructure bill, even if he has to sharply reduce his ask from $1.7 trillion in spending to $1 trillion or less. There are still major sticking points that make this highly unlikely. Republicans want the majority of the spending to come from money Congress already appropriated in prior relief bills, including the American Rescue Plan that passed in March. That would require a clawback of recovery aid that went to states and cities, which Democrats don’t support. Still, both sides are pretending some kind of compromise is possible, assuming Biden jettisons the corporate tax hike.
If an infrastructure bill passed with GOP support, Democrats wouldn’t have to use the reconciliation process allowing them to pass a bill with a simple majority vote instead of a filibuster-proof 60-vote majority. That has become momentous because of another bit of obscure news this week: The unelected official who makes the Senate rules said Democrats who control the Senate can pass just one more bill using the reconciliation process during the current fiscal year, which ends Sept. 30.
For the three people still paying attention, that means Senate Democrats can’t pass both of Biden’s legislative packages this year using the simple-majority reconciliation process. They could pass one this year and one next year, assuming all Democrats went along, but that would get dicey because 2022 is a midterm election year, when it’s notoriously difficult to pass major legislation. So passing a light infrastructure bill with Republican support would still leave Democrats for a big social-welfare plan they could pass in 2021 without any Republicans.
A corporate tax hike could pop up in any piece of legislation. Democrats could keep it out of an infrastructure package, but pop it into a social welfare package. Republicans know this and aren’t likely to get duped. The bottom line is that Biden’s hint at concessions and the new ruling on reconciliation indicate a gain in Republican leverage and a sobering reality check for Biden’s tax hikes.
A 28% corporate tax rate was unlikely anyway, given that a few Democrats think that’s too high. Raising it to 24% or 25% was plausible, but Biden himself may be undermining that with chatter of alternatives. Analysts think the full Biden tax hike would cut corporate earnings by around 6%, which in turn would probably tamp stock prices down. Stocks may be getting a reprieve, however. Investors just need to notice.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.
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