(The author is editor-at-large for finance and markets at
Reuters News. Any views expressed here are his own)
LONDON, March 12 (Reuters) - Global investors are obsessing
about borrowing costs, discount rates and inflation risks as the
world emerges from the shocking pandemic - but they are also
starting to pore over coming corporate tax hikes that could
reverse a decades-long decline.
Few governments struggling to vaccinate populations and
reopen economies are likely to raid companies just yet. Many are
still offering tax holidays or credits as ballooning government
debts are bridging the gap in revenues as well as funding public
supports and new spending stimulus.
But as Britain showed last week with a planned 7 percentage
point corporate tax rise to 25% in 2023, the taxman is coming.
Although no timeline is set, U.S. President Joe Biden has
promised to at least partly reverse predecessor Donald Trump's
business tax cuts and lift corporate income tax 7 points to 28%.
Biden has also injected new momentum into plans for global
taxation of digital and e-commerce giants, most of whom
benefitted disproportionately from pandemic lockdowns.
At a G20 meeting two weeks ago, Treasury Secretary Janet
Yellen dropped a Trump administration proposal to let big firms
opt out, raising hopes of meeting a Summer deadline for almost
140 countries to modernize outdated rules on taxing cross-border
commerce and a global minimum corporate tax rate.
If a greener, fairer and more indebted world is the
post-COVID legacy, as many investors insist, then higher
corporate taxes that have been falling for decades are likely to
be part of that mix too.
The average corporate tax rate across the developed world is
now just two thirds of what it was 20 years ago. Government debt
as a share of output in advanced economies has risen more than
50% over the same period.
According to Organisation for Economic Cooperation and
Development data, total U.S. tax on corporate profits in 2019
was below 1% of gross domestic product and less than 4% of all
taxation - both the lowest in at least 55 years and the lowest
in the G20. The equivalent UK stats were the lowest in 25 years.
Barclays analysts reckon median effective corporate tax
rates for FTSE 350 companies in Britain and S&P500 firms across
the Atlantic were 19% and 20% respectively - below the 22% OECD
average and 5 percentage points below eurozone averages.
"Following years of pro-business policies and falling
corporate tax rates, the trend may be about to reverse," wrote
Emmanuel Cau's equity strategy team at Barclays, flagging tax a
medium-term threat to earnings.
Cau estimates the 2023 UK corporate tax hike amounts to
about a 6% earnings "headwind" for the widest sweep of the large
domestically-exposed listed British companies. FTSE100 firms
with greater overseas income - where 'effective' tax rates that
account for different incomes, deductions and allowances were
already as high as 23% - would likely take a smaller 3% hit.
Although a 'super deduction' between now and March 2023 will
ease effective tax rates near term, that will not overlap with
the higher headline rate when it comes and there the latter may
have to be absorbed one-for-one into earnings.
Berenberg economist Kallum Pickering questioned whether the
politics of Brexit and Conservative party re-election will ever
see the headline tax rise come to fruition. But, if it does, he
reckoned it would lift effective tax rates more than headline
reductions over the past 20 years cut them and could drag on an
otherwise substantial post-pandemic rebound investment and
"It is a historical irony that, upon leaving the EU, the
pro-Brexit UK government has chosen to adopt a more
continental-style economic policy," he said.
Cau at Barclays said a U.S. corporate tax hike may take more
time but would likely have a similar impact on earnings as
estimated for UK firms. Supporting that, he cited the 10%
earnings upgrades that immediately followed the 8 point Trump
tax cut in January 2018 - slightly more than a 1:1 relationship.
Of course, different sectors will take different hits - not
least due to the variety of effective tax rates experienced. And
the relative weight of certain sectors in different economies
partly explains differences in total tax takes as a result.
IT and healthcare firms experience the lowest effective
rates below 20%, while energy and industrials among the highest.
As such, headline tax hikes may encourage the prevailing equity
investment rotation from growth to beaten down 'real economy'
stocks as the recovery matures.
With stock markets back at record highs overall, investors
hardly seem fazed yet about the coming taxes. Massive government
supports and investment spending and still historically super
cheap borrowing rates all help with that.
But perhaps the very lack of market anxiety - even its
acceptance of new post-pandemic priorities and norms - just
underlines an inevitable reversal of 40 years business tax cuts.
(by Mike Dolan, Twitter: @reutersMikeD
Editing by Alexandra Hudson)