© Reuters. FILE PHOTO: US President Joe Biden speaks to reporters after disembarking from Air Force One en route to Camp David at Hagerstown Regional Airport, Hagerstown, Maryland, US, February 4 2023. REUTERS/Elizabeth Frantz
By Saqib Iqbal Ahmed and Laura Matthews
NEW YORK (Reuters) – U.S. President Joe Biden put taxes and corporate share buybacks in the spotlight for investors during his State of the Union address on Tuesday night as part of his push to restructure the world’s largest economy so that it is less favorable to the richest.
Biden, who enacted a 1% tax on corporate share buybacks early last year, used his speech to call for it to be quadrupled, as well as to renew his calls for higher taxes on billionaires.
Investors said that while the chances of such a proposal passing Congress – where Republicans control the House of Representatives – were low, it could influence investor behaviour.
If companies feel such a tax is imminent, it could encourage them to speed up buybacks and eventually move on to paying dividends.
“We could see an acceleration and that could boost earnings and stock prices this year, maybe,” Jack Ablin, co-founder and chief investment officer of Cresset Capital, said before the speech. “If this tax encourages companies to increase their dividends instead of buying back shares, that’s definitely not a bad thing.”
The speech comes at a time when the , which had risen 6.2% in January, has been under some pressure as investors weigh encouraging words from the US Federal Reserve on some progress in control. of inflation against a strong labor market suggesting a longer policy period. squeezing
In an indication of the challenges Biden faces in implementing his wish list in a divided Congress, US stock futures barely moved after the speech.
Biden’s words on the $31.4 trillion debt ceiling were also of interest to investors. The White House has said that Biden will not negotiate on the need to raise that ceiling, while Republicans want spending cuts in exchange for their support.
“Some of my Republican friends want to take the economy hostage, I understand that, unless I agree with their economic plans,” Biden said.
Damien Boey, chief macro strategist at Barrenjoey in Sydney, said breaking that deadlock in Congress was critical as the government moved closer to hitting the debt ceiling.
“Obviously, Biden is clearly pitching to Republicans who want to work together. Most people anticipate that it won’t be an easy promise as he gets there.”
Investors also watched other themes, particularly comments on China, a key area of investor interest.
Given the recent downing of a suspected Chinese spy balloon off the coast of South Carolina by the US military, investors were looking to see how forcefully Biden would tackle US-China relations.
Biden said that if China threatened American sovereignty, the United States would act to protect the country.
“I was expecting some more aggressive comments on China,” said Naka Matsuzawa, chief strategist at Nomura in Tokyo. “Biden should be more clear about how they are going to develop the supply chain away from China. Trade with China continues to increase, rather than decrease, at this time.”
REBUY AND BILLIONAIRE
Corporate share buybacks, where public companies buy back their own shares, thereby increasing the share price as a way to return cash to shareholders, have grabbed headlines this year.
Even if the tax goes up, the ultimate impact may be relatively small, said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.
Silverblatt estimates that the current 1% tax will cut just 0.5% of the S&P 500’s earnings in 2023.
Share buybacks by S&P 500 companies are expected to total $220 billion by the fourth quarter of 2022, and 2023 will be the first fiscal year with more than $1 trillion in buybacks, according to data from the S&P Dow Jones Indices. .
If the tax were to go up to a levy of 2.5% to 2.75%, it could start moving money from buybacks to dividends, but not dollar-for-dollar, Silverblatt said.
Biden was especially critical of oil company profits. “I think it’s outrageous,” he said, noting that the United States would need oil for at least another decade.
Biden also called for another narrow tax increase: a “billion-dollar minimum tax” aimed at taxing unrealized capital gains from assets like stocks, bonds or private businesses of high net worth individuals.
That proposal would be a very complicated new tax regime, creating hardship for a currently overwhelmed Internal Revenue Service and complexity for taxpayers, according to the nonpartisan Tax Foundation.
Still, analysts were skeptical that this too would come to fruition.
“Tax proposals are dead since Congress is divided, so it’s more of a political talking point for the next campaign, just like the 1% tax has been in the past,” Ulf said. Lindahl, CEO of Currency Research Associates.