This Week in Debt and Taxes

Editors’ note: MarketMinder is nonpartisan, preferring no party nor any politician. Our analysis serves solely to ascertain government actions’ potential market impact—or lack thereof.

On Thursday, two widely watched political measures took steps forward: In the US, Congress advanced a measure to raise the debt limit, while Ireland signed on to the US-backed global minimum corporate tax deal. Here we will bring you up to speed on these matters—and put them in broader perspective.

Congress’s itty-bitty debt-ceiling can kick: Wednesday, Republican Senate Minority Leader Mitch McConnell cleared the way for Democrats to pass a standalone debt limit extension. As his statement noted, he would “allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December.”^[i] In other words, he wouldn’t filibuster a bill to raise the debt ceiling a smidge, so Democrats could pass it with a simple majority. 11 GOP Senators joined him, enough to allow a vote to advance—although not without intraparty rancor. Democratic Senate Majority Leader Chuck Schumer took him up on the offer the next day.

What now? Legislation is progressing to increase the debt limit by $480 billion to $28.9 trillion, passing the Senate in a 50 – 48 party-line vote today. A House vote is expected Tuesday. If it passes, it should let the government finance spending through early December. Then we will likely be facing another fight and having the same (predictable)^[ii] conversations about it over Thanksgiving. If so, don’t fret! Remember:

1. Default risk was always next to zero. Default doesn’t mean skipping spending. It means failing to pay interest or principal on Treasury bonds. The Treasury has the means (tax revenue) and the motive (a constitutional mandate) to service the debt. The likelihood of default was and remains miniscule.
2. Congress can always kick the can—in myriad ways—like they seem poised to next week (and 112 times before), which they will probably do again. Maybe the next time they will wait until the last moment—like usual.

136 countries’ corporate tax compromise: In other news, the global minimum corporate tax we discussed in June and again in July took a step forward this week. The plan seeks to establish a 15% minimum tax rate on multinationals’ profits where they are earned, not where they are headquartered. The main problem with this scheme: Tax havens stood to undermine the initiative—including Ireland, where many multinationals have flocked, and fellow EU members Estonia and Hungary—by refusing to sign on and undercutting the global minimum rate. For months, these nations have expressed reservations about the deal, which would see Ireland raise its tax rate from 12.5% to 15.0%.

But Ireland and Estonia dropped their opposition Thursday after countries already party to the deal made concessions. Hungary followed Friday. Ireland received assurances it can keep its 12.5% tax rate for firms with less than €750 million in annual sales and tax incentives for research and development. It also succeeded in revising the original text. Instead of it stipulating a minimum tax of “at least 15%,” it now omits “at least,” making future attempts to raise it likely very difficult.

Hungary joined after negotiators agreed to a 10-year implementation period before the tax takes effect and the ability for companies to deduct some costs, including payroll. Some other developing nations are still outstanding—Kenya, Nigeria, Pakistan and Sri Lanka. But the 136 countries that have signed on account for the vast majority of global GDP.

While Ireland, Estonia and Hungary coming into the fold is notable, there remains a long row to hoe. Countries must still pass legislation, which isn’t assured. For example, Congress probably needs bipartisan support to give foreign governments jurisdiction to tax American companies. This means changing a treaty, and that requires a two-thirds Senate supermajority for ratification—a high hurdle, in our view.

Meanwhile, some developing countries appear disgruntled at the last-minute exemptions, which they suggest leaves the agreement toothless and riddled with loopholes. Signatories are supposed to enact legislation next year for the accord to take effect in 2023. But that may be optimistic given lingering opposition—especially considering matters like America’s midterm elections.

For investors, even if everyone backs it, tax changes have no preset market impact—and we think the scope of this one is rather minor. It mostly just affects tax havens currently under the minimum. But as Estonian Prime Minister Kaja Kallas mentioned when she signed on, it “will not change anything for most Estonian business operators, and it will only concern subsidiaries of large multinational groups.”^[iii]

Irish economists, too, expect changes to have only a negligible impact, which history backs up. Ireland raised rates from 10% to 12.5% in 1997 to comply with EU rules. This did little to curb Ireland’s attractiveness to multinationals over subsequent decades. Ditto for the abolition of the so-called Double Irish tax arrangement, which allowed American multinationals to avoid taxes on their non-US profits.

We doubt a 2.5 percentage point change in tax rates affects most big multinationals’ competitiveness much. Besides, the focus on the headline 15% rate seems overstated. The devil is in the details. It remains to be seen how nations interpret the tax incentives and exceptions granted to bring tax havens in line—effective tax rates may be far lower than the proposed global minimum.

Above all, though, taxes are just one small factor for corporations. The economic cycle and business conditions are far larger drivers longer term. Also, the potential for slightly higher taxes, discussed for months now, is likely largely baked into market expectations already. We suspect the issue will fade into the long-term backdrop, popping up now and then as new developments—or setbacks—occur. But unless there is some big change, it is unlikely to have any material effect on markets.