Analysis: Biden tax increase might not be so bad for big banks

In this news, we discuss the Analysis: Biden tax increase might not be so bad for big banks.

NEW YORK (Reuters) – Democratic presidential candidate Joe Biden’s plan to raise corporate taxes would have a modest impact on the profits of major U.S. banks and likely not until 2022, analysts said.

Other aspects of Biden’s plan, including tax credits for low- and middle-income households and government spending on infrastructure, could lead to lower loan losses and higher loan income, they said. declared.

Banks have been big beneficiaries of tax cuts under President Donald Trump, making the reversal look worrisome. But a second look at what might happen if Biden wins the election and Democrats gain control of the US Senate suggests the pain may not be so bad.

Biden’s plan would raise the current corporate rate from 21% to 28%, postponing just seven of the 14 points of cuts adopted under the Trump administration.

The seven-point hike would cut big banks’ earnings per share by a median of 7.4% based on 2021 estimates, according to Morgan Stanley analyst Betsy Graseck.

For Wells Fargo & Co WFC.N, the estimated hit would be 10.2% because the vast majority of its operations are in the United States. For Citigroup Inc CN, which earns a lot of revenue overseas, that would only be 6.5%.

Analysts don’t think corporate tax rates will go as high as Biden has proposed, even if Democrats take over Congress in a so-called “blue wave.” The economy will be too fragile due to the coronavirus pandemic to adopt much higher rates, they said.

“There might be reluctance, especially with moderate Democrats, to raise taxes for fear that any fiscal tightening will slow economic activity,” said Issac Boltansky, director of policy research at Compass Point Research & Trading.

Biden’s proposed 28% rate would also face arguments that the total corporate tax bill from federal, state, and local levies would put US businesses at a disadvantage compared to global competitors who have rates. lower, said Rohit Kumar, co-head of PwC’s Washington national tax office.

A democratic sweep could benefit banks in another way, by launching proposed infrastructure projects. This government money would go to businesses and their employees, making it easier for them to repay their loans, analysts said.

Major U.S. banks have set aside more than $ 60 billion for potential loan losses since the start of the pandemic. If these losses do not materialize, banks will be able to reintroduce the money into reported profits.

An increase in public spending on infrastructure could also support loan demand and increase inflation. Higher interest rates would increase bank income from loans and securities.

Together, these factors could offset two-thirds of the 7.4% drag on bank profits from a 28% corporate tax rate, Morgan Stanley’s Graseck estimated.

There are many assumptions at play – if Biden wins, if Democrats take over Congress, if various proposals go as written – but bank shareholders fear that lenders will lose the huge profits they’ve made from cutbacks. ‘2017 taxes, analysts said.

Biden led Trump by 10 points, according to a Reuters / Ipsos poll earlier this month.

Higher rates would likely not take effect until 2022, analysts said.

Democrats would first try to prop up the economy and legislate on healthcare, racial injustice, wealth disparities and the environment before turning to reversing the gains the banks made under Trump Washington policy experts said.

The history of tax bills dating back to 1986 shows that it takes time to move forward through the legislative process and that increases almost always take effect in the future, Kumar said.

“It seems more likely that it’s January 2022 than January 2021,” he said.

Report by David Henry in New York; Editing by Lauren Tara LaCapra, Michelle Price and Steve Orlofsky

Original © Thomson Reuters

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