Corporate Tax Rate Increase May Be Smaller Than Expected
Fed: "Some Asset Prices Higher Than Average Even Considering Low Interest Rates"
[Asia Economy Reporter Gong Byung-sun] An analysis has emerged suggesting that the scale of U.S. President Joe Biden's economic stimulus package may pass at a lower level than expected. Concerns have also been raised that asset prices are inflated, making the stock market vulnerable to risks.
On the 8th, KB Securities argued that expectations for the size of fiscal policy should be lowered. The $1.9 trillion (approximately 2,128 trillion KRW) infrastructure investment plan may be insufficient compared to expectations. President Biden has advocated for tax increases on the grounds that the stimulus package should be implemented without expanding the fiscal deficit, and U.S. citizens are more concerned about fiscal soundness than tax hikes. KB Securities researcher Kim Il-hyeok said, “It is expected that an appropriate level of tax increase will be agreed upon along with a fiscal spending plan of a corresponding scale.”
The increase in the corporate tax rate is also expected to be smaller than anticipated. This means that the funds to support large-scale fiscal policy will disappear. On the 6th (local time), President Biden stated in a speech that he could accept a corporate tax rate of 25%. This is a step back from the proposal to raise the corporate tax rate from 21% to 28%. This also aligns with the proposal of Democratic Senator Joe Manchin. Researcher Kim said, “Without Senator Manchin's consent, it is difficult for the Democrats to pass the bill alone,” and added, “Investors expect that it will be difficult to raise the corporate tax rate above 25%.”
Concerns about a bubble in asset prices have also begun to surface. According to the Federal Reserve's semiannual Financial Stability Report, the financial environment is generally stable, but in some markets, prices have risen excessively compared to expected future cash flows. Even considering the low interest rates, prices are evaluated to be higher than the historical average. The Fed warned that if risk appetite weakens, disappointment over virus control occurs, or economic recovery slows, the prices of risky assets could fall sharply.
There are also concerns that interest rate hikes could exert downward pressure on asset prices. The recent upward revision trend in economic growth forecasts has stalled, and if the term premium on interest rates rises, market corporate valuations could decline. Researcher Kim said, “The strong rebound in the S&P 500 long-term earnings per share (EPS) growth forecast since mid-last year was due to upward revisions in economic growth forecasts for this year and next year,” adding, “If economic growth forecasts are not further revised upward, it will be difficult for profit growth expectations to continue rising, and the market may react sensitively to interest rate hikes.”
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