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Higher taxes are coming and for markets, that could be a good thing By Reuters

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© Reuters. FILE PHOTO – This picture was taken in Prague on January 23rd 2013. It shows U.S. dollars and Euro banknotes. REUTERS/David W Cerny

By Dhara Ranasinghe and Sujata Rao

LONDON (Reuters) – And so it begins: Taxes in the world’s wealthiest countries are rising. This is not surprising given the COVID-era debt boom. However, some investors believe it’s a good thing to help close the wealth disparities that have been created by the global pandemic.

The tax increases that Britain saw last year as the largest borrower in terms of gross domestic product (GDP), grabbed attention when it raised its taxes for workers and employers. This could raise up to 12 billion pounds ($17.3 billion annually).

American markets have been jittery after Democrats introduced raising tax rates on corporations and individuals with an annual income of more than $400,000.

Wealthy individuals will not be happy with higher taxes, even though several investment banks are lowering their Wall Street predictions for 2022. Goldman Sachs (NYSE:) reckons earnings-per-share would be 5% lower if corporate taxes go to the 25% proposed.

But economists and investors seem unperturbed. Many even think that tax hikes targeted at reducing inequality would benefit the markets over time.

A return to “austerity,” policies after 2008-9’s crisis seems unlikely. This is because of sluggish economic growth, increasing poverty, and other socio-economic changes such as Britain’s 2016 Brexit vote. These belt-tightening decades are frequently blamed for slowing down.

Investors note that efforts to increase personal taxes in the major Western countries have not been overwhelming and will not negatively impact economic growth or equities markets.

For example, the 1.25 percent increase in National Insurance rates in Britain amounts to a half-percent of GDP. Brokerage AJ Bell estimates that a rise in the dividend tax will only result in a 100 pound annual loss for those who earn 10,000 pounds a years in dividends.

Even modest measures to reduce debt could prove beneficial for bond markets.

Fahad Kamal is the Chief Investment Officer at Kleinwort Hambros. He doesn’t see any political motivation to reduce spending from pandemic years. These programs “kept the lights on” and provided support for everyone who needed it.

However, he stated that there was “clearly a plan for addressing the enormous increase in debt we have had over the past one-and-ahalf years is a good idea.” He also spoke out about the UK tax rise.

Michele Napolitano from Fitch Ratings’ Western European Sovereigns said that efforts to reduce debt are “part” of stabilizing Britain’s negative outlook.

Recent statements at a conference showed that the West European debt crisis is creating a “regrettable situation” in which there was no desire to see public debt rise forever.

For a graphic on Global debt fast approaching $300 trillion:

https://fingfx.thomsonreuters.com/gfx/mkt/gkplgwwmqvb/IIF1409.PNG

DEBT MOUNTAIN

It’s easy to see why governments are worried.

The Institute of International Finance has estimated that global indebtedness includes household, corporate, and government debts. This record amount is nearly $300 trillion. $4.8 trillion was added to the total in the second quarter of 2021.

Janus Henderson’s study found that global debt rose to $9.3 trillion in 2020. This is more than all eight years of borrowing.

For a graphic on Central bank balance sheets and the MSCI world stock index:

https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwknblvo/cbanksMSCI1709.PNG

But there is little chance austerity will take hold as it did in Europe after 2009; capitalising on record low interest rates and central banks’ money-printing programmes, governments continue to spend.

While the European Union’s rules limiting government borrowing are being suspended, massive U.S. spending plans and poverty-reduction programs such as the $1.8 trillion American Families Plan continue to be pursued.

An Urban Institute study has shown that targeted spending is possible to reduce poverty in the United States by nearly half. The results of pandemic assistance programmes have reduced U.S. poverty levels almost 50% compared with 2018.

Also, the crisis highlighted the widening wealth gap. According to Oxfam, the richest billionaires in the world were $3.9 trillion better off between March 2019 and December 2020.

This wealth presents a low-hanging fruit for policymakers looking to raise money. Analysts point out the Biden administration’s plans and China’s “shared prosperity” drive.

Given the central bank’s role and interest rates, governments are not under any pressure to reduce their debt. It is more because there is inequality,” Kiran Ganesh (head of multi-asset at UBS Global Wealth Management) said. She predicted wealth redistribution as a key theme in the next few years.

REDISTRIBUTION

If inequality has dragged on growth, as organisations such as the IMF have repeatedly warned, redistribution should support economies and in turn, stock markets.

A Congressional estimate suggests that Democrats are seeking tax code modifications to reduce taxes for Americans with incomes below $200,000 each year.

Tom O’Hara is a Janus Henderson Investors portfolio manager. “One result is that wages will rise because the less well-paid pay more taxes and those who have more money in their pocket have a tendency to spend.”

According to a study that was presented this year at the U.S. Jackson Hole conference, income inequality can lead to lower bond yields. This is because wealthy people tend save more of their income.

For a graphic on High US savings:

https://fingfx.thomsonreuters.com/gfx/mkt/zgvombkeqvd/USSAVINGS1709.PNG

“It’s easy to see tax increases as a short term negative for investors but if you see people not on higher incomes suddenly get more income it can be positive for the economy and markets,” said UBS’s Ganesh.

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