Chart of the Week - Corporate Tax Rates

The USA is leading the way in the Global race to the bottom (15%)

While anything can happen (and probably will) heading into November, the consensus at least for now is that Trump will win the Presidential election — and one of his remarks last week prompted me to refresh my work on Corporate Tax Rates.

The plan or proposal (and of course it is one thing to make a promise on the campaign trail vs what you can actually get legislated) is to take the US corporate tax further lower from 21% down to 15%.

The interesting thing is this would take it in line with the 2021 OECD agreement on a global minimum corporate tax rate of 15% (ironically implemented as part of an effort to discourage a race to the bottom on competitive reductions to corporate tax rates).

It would also not be far off the current *effective tax rate* of US listed companies, which is tracking between 15-20% — and potentially provide a final leg lower in the multi-decade trend of falling effective tax rates (partly achieved by the use of global tax havens and financial engineering).

That trend by the way has been a material tailwind to US corporate earnings and by extension the world-beating returns of US equities (for reference, FY 2023 earnings would be at least 25% lower if the peak effective rate of around 40% from the early-90’s prevailed, and that’s not considering the reinvestment and indirect multiplier effects and incentives of lower corporate tax rates).

It would also further widen the gap between the USA and global ex-US listed companies (for clarity I am talking about the aggregated index view), which would give US listed companies yet another earnings edge vs their global peers.

So it should in theory be, at the margin, bullish for US equities — the trouble is much uncertainty remains (it’s still a long way until November), and again we don’t know when or if (or to what extent) it would get legislated, and there’s also the issue of how it gets paid for not to mention the wider problem of fiscal sustainability.

But it does serve as a prompt to consider the impact of tax trends in global equities, the potential policy outlook, and the increasingly uncertain environment over the coming months (again, another reason why equity volatility should be higher near-term).

Key point:  The possibility of another Trump Tax Cut for US corporations would extend the trend of falling effective tax rates for US stocks.

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Topics covered in our latest Weekly Insights Report

Aside from the chart above, we looked at several other charts, and dug into some intriguing global macro & asset allocation issues on our radar:

• Global Markets Update: key developments, major moves, outlook

• Compression Trades: “calm before the storm“ in WTI Crude + DXY

• China Macro: why more stimulus is needed and on the way

• Gold Price: outlook for gold (tailwinds, upside prospects)

• Silver: also sees upside but not in second place

• Gold Miners: a cheap alternative hedge

• Corporate Tax: trends, impact, constraints

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Callum Thomas
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