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

On Sep 20, 2021

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 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.

For a graphic on Global debt fast approaching $300 trillion:

https://fingfx.thomsonreuters.com/gfx/mkt/gkplgwwmqvb/IIF1409.PNG

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…