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Financial Planning > Tax Planning

New Tax Deal Is a Bill the Markets 'Can Live With': Valliere

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Senate Majority Leader Chuck Schumer and Sen. Joe Manchin struck a secret tax deal late Wednesday that “the markets can live with,” according to Greg Valliere, chief U.S. Policy Strategist for AGF Investments.

“No one in Washington — including us — saw this coming: Given up for dead, a package of new environmental spending and modest tax hikes has won the approval of mercurial” Manchin, Valliere said early Thursday in his Capitol Notes newsletter.

In releasing The Inflation Reduction Act of 2022, the new proposal for the FY 2022 Budget Reconciliation package, Schumer said “this Senate Democratic Majority will take action to finally take on Big Pharma and lower prescription drug prices, tackle the climate crisis with urgency and vigor, ensure the wealthiest corporations and individuals pay their fair share in taxes, and reduce the deficit.”

The Senate will vote on The Inflation Reduction Act of 2022 next week, he explained.

The bill includes measures to “make biggest corporations and ultra-wealthy pay their fair share,” according to a bill summary, and includes “no new taxes on families making $400,000 or less and no new taxes on small businesses — we are closing tax loopholes and enforcing the tax code.”

The new plan will invest roughly $300 billion in deficit reduction and $369 billion in energy security and climate change programs over the next 10 years.

Why is it the bill the markets can live with? “There’s no tax hike on most corporations or individuals in general; there’s no tax hike on unrealized gains, there’s no global tax, and there’s nothing new on capital gains or estate taxes,” Valliere explained in his latest briefing.

The bill does, however, “contains several bombshells: the global minimum corporate tax has been dropped, funding for electric vehicles is back, the carried interest loophole finally may be killed, and there could be a new U.S. corporate minimum tax,” the policy expert said.

The Manchin-Schumer tax changes, according to a summary of the bill, are:

  • 15% corporate minimum tax applied to companies with profit of over $1 billion
  • Potential carried interest limitations
  • Enhanced IRS funding for enforcement
  • Removal or softening of international tax provisions
  • No adjustments for state and local taxes (or SALT)

As for prescription drug changes, the bill will “finally allow Medicare to negotiate for prescription drug prices and extend the expanded Affordable Care Act program for three years, through 2025,” the summary states.

Analysis by the Committee for a Responsible Federal Budget notes that the bill uses Fiscal Year (FY) 2022 reconciliation instructions “to raise revenue and lower prescription drug costs in order to fund energy, climate, and health care provisions as well as reduce the deficit.”

Based on the initial summary posted on Thursday, the Committee states, “the legislation appears to include roughly $790 billion of offsets to fund roughly $485 billion of new spending and tax breaks (as negotiators [now] account for the policies, it includes $739 billion of offsets and $433 billion of investments).”

The group adds: “Unlike prior versions of this reconciliation bill, such as the House-passed Build Back Better Act, this legislation would reduce deficits by more than $300 billion over a decade. This deficit reduction, along with other elements of the bill, is likely to reduce inflationary pressures and thus reduce the risk of a possible recession.”

Chances of Passage

Raymond James analysts said Thursday that they see “the main hurdle for the reconciliation bill being the support of Senator [Krysten] Sinema, D-Ariz., on tax changes (some are skeptical she will agree to the deal), but opposition by House members seeking SALT changes is likely lessened by the expanding contents of the bill.”

Valliere sees a fight among the Democrats. “The Republicans are remarkably unified — they will not support this bill in any shape or form,” he said. “A major GOP sound bite in the fall election campaign will be to blast the idea of tax increases and more spending in the face of higher inflation and a potential recession.”

The chances of its passage are “a little over 50%,” Valliere opined. “Why isn’t this number higher? Schumer and Manchin cut the deal in secret, not informing most Senators, which means there are bruised egos from Democrats who had no input. This will make [House Speaker] Nancy Pelosi’s task difficult when the Senate bill lands on the House floor after the August recess ends in early September.”

Since final enactment “is perhaps two months away, there will be plenty of time to pick at specific provisions, many of which are quite controversial,” Valliere said. “An increase in the state and local tax deduction was omitted, angering House Democrats from wealthy states. And the global tax hike was omitted, a huge blow to Janet Yellen, whose tenure as Treasury Secretary may be fading.”

(Image: Shutterstock)


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