Biden set to unveil sweeping infrastructure bill. Will U.S. tax increases follow?
On the latest edition of Market Week in Review, Paul Eitelman, chief investment strategist for North America, and Research Analyst Laura Bardewyck discussed the latest COVID–19 developments, the impact a U.S. infrastructure bill could have on taxes and the Bank of Canada’s recent announcement on its bond–buying program.
Vaccines and fiscal stimulus likely to keep U.S. recovery on track
There’s been mixed news surrounding efforts to curb the coronavirus pandemic over the past few weeks, Eitelman said, with parts of Europe experiencing another surge in cases. “This third wave of COVID–19 infections has led some countries to reinstate lockdown measures, including Italy and France,” he stated, adding that Germany had also called for a new round of restrictions before recently reversing course.
Eitelman noted that Europe has also struggled with its vaccine rollout, when compared to the U.S. and the UK, with approximately 10% of European Union residents having received at least one dose. By contrast, roughly 50% of adults in the UK and 25% of adults in the U.S. have been at least partially vaccinated, he said. However, Europe does appear to have made some additional progress over the past week, Eitelman added.
The U.S., meanwhile, has seen a flattening out in COVID–19 infections following a substantial decline earlier this year, he noted. In addition, some states are experiencing another spike in cases, which Eitelman said was a bit worrying. “Importantly, however, I believe there are two offsetting factors to this recent trend that will keep the U.S. economy on track for a very strong second half of 2021: the nation’s accelerating vaccination campaign and the recent passage of the American Rescue Plan,” he stated.
Eitelman explained that one component of the US$1.8 trillion stimulus package—another round of stimulus checks—is already flowing out to qualifying households, helping to provide more income support and pushback against any disruptions to mobility. On the vaccine front, the U.S. is aiming to make vaccines available to all adults by May 1, which would be a substantial step in the fight to end the pandemic, Eitelman said. “If this timeline holds, I think the U.S. could see some fairly exceptional growth later this year as more businesses reopen,” he noted.
Tax increases possible amid plans for major U.S. infrastructure package
U.S. President Joe Biden plans to unveil a substantial infrastructure package soon—to the tune of US$2 to US$4 trillion, Eitelman said. “This proposal, which would rebuild or repair roads and bridges across the nation, would probably be paid for by an increase in taxes,” he explained. Although the details have yet to be released, Eitelman said that an increase in the income tax rate for families earning over US$400,000 a year could possibly be part of the plan.
Other potential ways to pay for the package include a possible increase in the capital gains tax, moving it closer to the ordinary income tax, as well as a hike in the corporate tax rate from 21% to 28%. Such a move would unwind about half of the corporate tax cuts enacted by the Tax Cuts and Jobs Act of December 2017, Eitelman said. This, in turn, could have meaningful impacts on U.S. earnings growth in 2022, he noted.
“Tax planning is vital in order for financial advisors to help their clients achieve retirement goals and other outcomes,” Eitelman said, “and there will be plenty of very important watchpoints in the weeks ahead that could impact investors as more details on the infrastructure plan are released.”
Bank of Canada considers tapering quantitative–easing program
Shifting to global central banks, Eitelman noted that there’s been a recent divergence in the monetary policy stances among some of the major ones. In particular, a few central banks have signaled that they will be removing some levels of accommodation in the months ahead, including the Bank of Canada (BoC), he said.
“In a March 23 speech, Deputy Governor Toni Gravelle said that the BoC will be removing emergency liquidity programs put in place during the onset of the pandemic. Gravelle also said that the BoC is considering winding down its monthly asset–purchase program in the next few months,” Eitelman stated. The comments were surprising, he said, given that the Canadian central bank typically moves in lockstep with the U.S. Federal Reserve (the Fed), as any deviations in policy can have implications for currency markets. Ultimately, the BoC appears to be impressed with the robustness of Canada’s recovery, he noted.
Norway’s central bank, Norges Bank, also recently announced that it may increase rates during the second half of 2021, Eitelman said, after previously indicating that it would hold off on rate hikes until 2022. “If Norges Bank does raise rates later this year, it would be the first of the major central banks to do so since the pandemic began,” he observed.
Despite the hawkish guidance emerging from Norway and Canada, Eitelman said the fact that the Fed remains very committed to easy–money policies is of key importance. “Ultimately, what the U.S. does matters a great deal for global financial markets,” he stated, adding that the Fed’s commitment to an accommodative stance has been important in curbing the rise in bond yields in the U.S. and around the globe.