March 29, 2022

Biden's Budget: No Friend For Investors

This week President Biden unveiled his Budget Proposal for the next fiscal year 2022-23.

Aside from the stunning size of it all. It will be by far the largest budget ever, not associated with a national emergency like a war or the Pandemic.

The Budget proposal is for an incredible 5.79 trillion in expenditures. Creating a deficit of “only” (their word) 1.5 trillion deficit. I remind you, dear reader, that our first-ever trillion-dollar budget, was just 5 years ago.

Up until 2019 we never had a 1 ½ trillion-dollar budget. So obviously we could not have had a 1 ½ trillion deficit. We never spent that much!

But there is much more in this new budget. A couple of items that every investor needs to be aware of.

Let's begin with the corporate income tax rate. Currently the United States taxes corporation at a 21% rate.

This ranks the US at the low end of the tax scale. And gives us a real competitive advantage over most of the advanced economies in the world.

Under this new proposed budget, the US Corporate rate will rise to 28%. Now the fact is that we will lose the competitive advantage we just spoke about.

America will now have a higher rate than China, France, Canada, Russia, and 13 other countries in the G20.

The US will be joining only Germany and Japan in the nose bleed section of corporate taxation worldwide.

But the magnitude of this move will have a devastating effect on corporate income statements this year.

This is a one-third jump in the corporate tax rate. The largest such move I ever remember.

My back-of-the-envelope calculation shows that assuming Apple Computer earns this year what it did last. This will be an 8 billion dollar hit to their bottom line. How do you think that will affect earnings?

And lest you think that the comment about becoming non-competitive is an idle one: I remind the President of the case of Accenture.

Accenture is a big corporate consulting and information technology company. Begun under the former Arthur Anderson, these guys truly are the best and the brightest in terms of getting the most out of a corporation.

Back in 2009 just at the beginning of the Obama/Biden administration, Accenture decided to get out of dodge. The company packed up, lock stock and barrel, and headed to Ireland. Where they are still headquartered today.

A major reason for that move was the comparative tax rates. Ireland's corporate tax rate was and is so much lower than the USA. 

Under this new Biden Budget, the tax advantage for Ireland once again becomes uber attractive, with a 15.5% advantage to the Irish. And don't look now, but the Swiss aren't that far behind.

Finally the Budget's ultimate cause for alarm for investors: is the introduction for the very first time of a wealth tax.

A little history might be in order. The year was 1913.   The year Congress passed the Federal Reserve was finally approved.

It was also the year that the 16th Amendment to the US Constitution was ratified. The Amendment that initiated the Federal Income Tax.

Here is the Amendment in its entirety:

"ARTICLE XVI. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

Now I'm not a lawyer or even a legislative aid in the Biden Administration, But I can't seem to get any reference to wealth in that Amendment.

Yet somehow Biden did. And in a provision he calls the “Billionaire's Minimum Tax” he proposes to levy a tax on everyone with a wealth of over $100 million dollars.

Now forget for a moment that 100 million bogey.

What's important here is the principle. And the principle is this. The 16th amendment provides for a Federally collected INCOME tax.

Not any other type of taxes. And certainly not a wealth tax.

And beware. Once they establish this wealth tax, what's to prevent them from lowering that level? Even to the diminutive level of wealth that you and I may have?

It's a very dangerous precedence, of questionable legality. And it should concern every investor who has substantial assets.

So my bottom line on all this.

It is one more effort by this Administration to push the limit. Going well beyond what has been up to now accepted Government tax practices.

My personal view is that this could not come at a worse time. When companies are still struggling with supply chain woes and the lingering health issues of Covid among their workers. Along comes Biden to hammer them with a 33% bump in their corporate tax rate.

Not very good timing.