Biden’s Tax Plan: People vs Profit


On March 31st, 2021, President Joe Biden unveiled its $2 trillion infrastructure packages as part of his administration's focus on post-pandemic economic strategy. This investment is his second major initiative after the previous $1.9 trillion COVID-19 relief pack unfolded in early March. Included in that package is $621 billion for transportation infrastructures like roads and bridges, with $174 billion of that set aside for the electric vehicle market, $111 billion for clean drinking water, $100 billion for expanding broadband, and $100 billion for power infrastructure like the electric grid. The US legislative has approved this stimulus package after a fierce fight in the house of Representatives, which was won narrowly by the democratic party and got 50-49 votes in the senate. The United States of America's senate majority leader, Chuck Schumer, reflecting on the outcome, said the Republican party had failed to support a law that many conservative-leaning voters appear to find popular, leaving Democrats no choice but to act on their own. Furthermore, The Joe Biden's taxation plan is predicted to be approved as well, which insinuates a rise in corporate tax to 28% from the previous 21% and raising the global minimum tax. Despite criticism of the corporate tax hike, Biden guarantees that he would burden those with incomes below $ 400,000. The proposed tax plan intends to stop "unfair and wasteful profit shifting to tax havens, and ensures that large corporations are paying their fair share," the White House announced in a fact sheet released Wednesday (3/31).


Goldman Sachs, an investment banking company, assumes that politics will diminish Biden's plan. The opposing political party, the Republicans, are predicted to mass oppose the tax hikes, while some Democrats may be cautious too. The $2 trillion investment would positively impact stocks such as transportation and e-commerce. Wedbush Analyst Dan Ives stated on Wednesday (03/31) that the predicted $200 billion investment towards electric vehicle initiatives would boost stocks, including Tesla and Fisker, by around 2%, respectively. Also, shortly after the market open on (03/31), the Dow Jones Industrial Average was up 0.2%, S&P 500 increased 0.4%, and Nasdaq (which recently underperformed) rose 0.8%. Shares of industrial giants Nucor and Textron are up by 3% and 1.4%, respectively, as investors anticipate Biden's massive infrastructure investment. With that said, there will always be a risk involved. Implementing such a tax hike could throw the stock market out of balance, coercing a portion of investors to sell before the tax strikes. Previously, similar tax hikes have resulted in decreased stock prices and less investment in the stock market. Thus, Biden's tax plan might also severely impact corporate profits. Despite this, those effects were fleeting and reversed after the hike. The last time the capital gains tax rate increased in 2013, the S&P 500 rose about 30%. Therefore similar consequences triggered by Biden's tax plan would likewise be short-lived.


Nevertheless, this policy has opened the opportunity for all country that is investors friendly to make up USA companies to invest in that particular country. Bank Permata economist, Josua Pardede, predicted that the higher tax that Joe Biden proposes makes Indonesia's opportunity to be the investment relocation country widely open. However, the United States secretary of the treasury, Janet Yellen, says that the US is working with other G20 nations to develop and implement a global minimum tax to avoid US-based companies' relocation. Without a global minimum tax, the United States would have higher rates than several other major economies. World Bank President David Malpass said finance leaders from the G20 would discuss global tax issues, including digital services, adding that international attitudes shifted away from continual tax reductions. "Taxes matter to development, and it's important that the world get it right," Malpass said in an interview on Tuesday (4/2). In essence, Joe Biden's taxation plan generates a distinctive output toward the capital market. On one side, it could develop significant sentiment for several investors, increasing the stock price related to the infrastructure industry. While on the other hand, the late decision could also deteriorate the overall stock price due to the taxation plan itself.


Sources:

CNBC

CNN Business

Forbes

PwC Indonesia


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