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Week in Perspective: More Tax Worries?

Week in Perspective: More Tax Worries?

June 08, 2021

Are you tired of hearing about taxes?

Me too!

But here we are. So..... let's dive in.

We've got dueling infrastructure bills, plus a big proposed budget with lots of spending (and higher taxes inside).

That's a lot of expensive legislation on the table.

What's going to happen next?

The Democrats and Republicans seem pretty far apart on their respective infrastructure deals, which opens up the possibility that Democrats could go it alone and try to pass a package entirely without Republican support.1

That would be very difficult to accomplish.

It's also possible that both parties could align around a smaller bill and then the Democrats attempt to pass any extras through budget reconciliation.

Bottom line, we don't have enough clarity to know what a final infrastructure deal will look like. Given the political hurdles, the debate might drag on through summer.2

How likely are taxes to go up?

Well, my crystal ball's about as clear as mud right now, but let's break down what we see on the table.

President Biden's $6 trillion proposed budget offers a lot of spending and higher taxes to pay for it.3 None of these tax hikes are a surprise as they are in line with what Biden has promised before.

Wealthy taxpayers are looking at a higher top income tax rate, higher capital gains taxes, and the loss of the step-up basis on inherited assets.

Corporations are also in the line of fire, facing an increase in corporate tax rates, which could affect profitability.

That's currently what's on the table.

However, Biden's desire to raise taxes faces major headwinds (even inside his own party). His proposed budget is very much a wish list and will face challenges getting approved by legislators.4

It's very possible that some (or all) of these proposed tax hikes will get axed during negotiations.

How likely is it that any tax hikes will be retroactive?

One of the big shockers coming out of recent tax news is that the higher capital gains taxes could be made retroactive to get April 2021.5

There is historical precedent for this as it has happened a number of times before.6 However, retroactive tax changes are often for tax decreases.

I think it's very unlikely for an increase to be retroactive. There is too much opposition from both sides of the aisle.

Bottom line, I do think that higher taxes are coming. But I'm not sure that they will be as big or far-reaching as the Biden administration wants.

With so much uncertainty around taxes, now is not a time to panic, but to think carefully and make adjustments where needed.

The stock market ended the first week of June on a higher note with the Dow, S&P 500, and Nasdaq advancing a respective 0.7%, 0.6%, and 0.5%.

The first half of the abbreviated week was very quiet, as the S&P 500 shed two points on Tuesday and gained six on Wednesday. That masked a strong start from the energy sector, which gained 6.7% during the week, extending its year-to-date advance to 45.3%. The sector benefited from a 5.0% rally in the price of oil, which climbed to $69.61/bbl, its highest level since mid-October 2018.

Growth stocks showed some weakness on Thursday, pressuring sectors like technology, communication services, and consumer discretionary. However, they bounced on Friday as Treasury yields fell in response to a weaker than expected Employment Situation report for May. Technology and communication services gained a respective 1.2% and 0.6% for the week while the consumer discretionary sector lost 1.0%.

The past week saw renewed volatility in stocks that made headlines earlier this year. AMC (AMC) surged 95.2% on Wednesday and gained 83.4% for the week while GameStop (GME) and Bed Bath & Beyond (BBBY ) gained a respective 11.9% and 13.3% for the week.

On the news front, the G-7 neared an agreement on a 15% global minimum corporate tax while the Biden administration negotiated the terms of an infrastructure spending package with Republicans. The administration also signaled openness to implementing a minimum corporate tax rate of 15% instead of raising the top rate to 28% from 21%.