Centrists have put the kibosh on President Joe Biden’s tax-rate hikes for corporations, individuals and capital gains. But Wall Street is keeping the Champagne on ice as Democrats’ desperate hunt for tax revenue leads to unexpected places. Here’s what the latest tax-hike proposals might mean for Amazon (AMZN), Tesla (TSLA), Facebook (FB) and Warren Buffett’s Berkshire Hathaway (BRKB), among others.
As Democrats look for offsets to pay for their nearly $2-trillion social-spending package, three partial funding sources have come to the fore. Keep in mind that these tax elements would fall far short of covering the bill’s cost, and they’re far from a done deal. Every Democratic senator has an effective veto and Sen. Joe Manchin reportedly criticized the billionaire’s tax discussed below as “convoluted” on Wednesday.
Corporate Minimum Tax Hits Warren Buffett Hardest
Ariz. Sen. Kyrsten Sinema single-handedly nixed a hike in the base corporate tax rate from 21% to 25% or higher. Now it appears that S&P 500 earnings could be 5% higher than 2022 estimates which had baked in that Biden tax hike, Goldman Sachs analysts wrote.
However, Sinema apparently is on board with a narrower measure imposing a 15% minimum tax on companies earning at least $1 billion. The latest minimum-tax proposal is similar to Biden’s tax-hike proposal for a 15% minimum tax on book income, or GAAP income reported to shareholders, for companies earning at least $2 billion.
Morgan Stanley’s research division crunched the numbers on the Biden tax-hike proposal in a May report and found that the extra $10 billion-$20 billion in annual tax liability would fall hardest on financial services, communications services, information technology and industrials.
Warren Buffett’s Berkshire Hathaway “is uniquely exposed given the company’s large portfolio of investment securities,” wrote Morgan Stanley researchers led by Todd Castagno. “Book tax policy would create a quasi mark-to-market capital gains tax system” on Buffett’s investment holdings.
Meanwhile, Morgan Stanley estimated that the Biden tax-hike provision would have reduced net income for Amazon by 5%-9% the past two years.
Billionaire’s Tax On Unrealized Gains
The most controversial of the three tax provisions is a new billionaire’s tax that just surfaced in the past week. Biden had sought to change tax law so that capital gains would apply to inherited assets. Currently, inherited assets have their basis price stepped up to their value at the time of transfer.
However, Democrats appear leery of any broad inheritance tax change that might apply to family businesses. So they’ve shifted to a tax change that would fall solely on billionaires, even though it could contribute to intermediate-term volatility in share prices. That assumes the provision passes muster with the Supreme Court, which is far from certain.
Rising stock prices aren’t subject to capital gains taxes until the asset is sold. But the proposal from Sen. Ron Wyden, D-Ore., would impose taxes based on unrealized gains each year for about 700 billionaires.
Given the massive unrealized gains for Elon Musk, Jeff Bezos, Bill Gates, Mark Zuckerberg, Warren Buffett and others, the proposal would force these billionaires to sell off a sizable chunk of their holdings in Tesla stock, Amazon, Microsoft (MSFT), Facebook and Berkshire.
Corporate founders generally acquire their shares for minimal cost. That means virtually all of Musk’s $250-billion Tesla stake, or Zuckerberg’s more than $100 billion in Facebook stock could be subject to the 23.8% federal capital gains tax rate. That includes a 3.8% Medicare tax.
While the tax could be paid over five years, that’s still a lot of stock to unload — more than $50 billion worth of Tesla stock for Musk and about $25 billion in Facebook stock for Zuckerberg.
Tax Hike On Stock Buybacks Would Pinch EPS
Facebook just announced plans to buy back $50 billion in stock, so there might be a logical buyer for Zuckerberg’s shares. But that brings us to the third new Democratic tax-hike proposal: a 2% tax on stock buybacks.
Under the plan, the 2% tax on Facebook’s $50-billion buyback would subtract close to $1 billion from earnings. The taxable portion of stock buybacks would be reduced by any stock issuance, including as compensation, over the same period.
Without such a tax, the $50-billion buyback would boost Facebook earnings per share by nearly 6%. But a buyback tax would shrink the EPS gain to about 3.6%, dampening the positive impact on Facebook stock.
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