Investors focus on buybacks, billionaire tax in Biden speech
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[February 08, 2023] By
Saqib Iqbal Ahmed and Laura Matthews
NEW YORK (Reuters) -U.S. President Joe Biden put taxes and corporate
stock buybacks squarely in investors' focus during Tuesday night's State
of the Union address as part of his push to restructure the world's
largest economy to be less favorable to the very wealthy.
Biden, who earlier last year signed into law a 1% tax on corporate stock
buybacks, used his speech to call for that to be quadrupled, as well as
renew his calls for higher taxes on billionaires.
Investors said that while the chances of such a proposal passing in
Congress - where Republicans control the House of Representatives - were
low, it could have some bearing on investor behavior.
If companies sense such a tax is imminent, it might spur them to speed
up buybacks and eventually shift toward paying dividends instead.
"We could see an acceleration and that could boost earnings and equity
prices this year, perhaps," said Jack Ablin, co-founder and chief
investment officer at Cresset Capital, ahead of the speech. "If this tax
encourages companies to raise their dividends instead of buying back
shares, all in all, it's not a bad thing."
The address comes at a time when the S&P 500, which had rallied 6.2% in
January, has come under some pressure as investors weigh the U.S.
Federal Reserve's encouraging words on some progress on controlling
inflation against a robust labor market that hints at a longer period of
policy tightening.
In an indication of the challenges Biden faces in implementing his wish
list in a divided Congress, U.S. stock futures barely moved after the
speech.
Biden's words on the $31.4 trillion debt ceiling were also of interest
to investors. The White House has said Biden will not negotiate over the
need to lift that ceiling, while Republicans want spending cuts in
exchange for their support.
"Some of my Republican friends want to take the economy hostage - I get
it - unless I agree to their economic plans," Biden said.
Damien Boey, chief macro strategist at Barrenjoey in Sydney, said
overcoming that gridlock in Congress was critical as the government gets
closer to hitting the debt ceiling.
"Obviously Biden is clearly pitching to the Republicans is that they
want to work together. Most people anticipate that is not going to be an
easy promise as you get there."
Other topics were also watched by investors, particularly remarks on
China, a key area of interest for investors.
Given the recent shooting down of a suspected Chinese spy balloon off
the coast of South Carolina by the U.S. military, investors were looking
to see how forcefully Biden addressed U.S.-China relations.
Biden said that if China threatened U.S. sovereignty, the U.S. would act
to protect the country.
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U.S. President Joe Biden speaks to
reporters after disembarking from Air Force One en route to Camp
David at Hagerstown Regional Airport, Hagerstown, Maryland, U.S.,
February 4, 2023. REUTERS/Elizabeth Frantz
"I expected some more hawkish comments on China," said Naka
Matsuzawa, chief strategist at Nomura in Tokyo. "Biden should be
clearer about how they are going to develop the supply chain away
from China. Trade with China is still increasing, rather than
decreasing, at this moment."
BUYBACKS & BILLIONAIRES
Corporate stock buybacks, where public companies buy back their own
shares, thereby juicing the price of the shares as a way to return
cash to shareholders, have grabbed headlines this year.
Even if the tax goes up, the ultimate impact may be relatively
small, said Howard Silverblatt, senior index analyst at S&P Dow
Jones Indices.
Silverblatt estimates the existing 1% tax will shave off only 0.5%
from S&P 500 earnings in 2023.
S&P 500 companies' stock buybacks are expected to total $220 billion
for the fourth quarter of 2022, with 2023 set to be the first fiscal
year with over $1 trillion in buybacks, according to data from S&P
Dow Jones Indices.
If the tax were to go up to a 2.5% to 2.75% levy, it could start to
move money from buybacks to dividends, but not dollar for dollar,
Silverblatt said.
Biden was especially critical of oil companies' profits. "I think
it's outrageous," he said, while noting the United States would need
oil for at least another decade.
Biden also called for another narrow tax increase: a "billionaire
minimum tax" aimed at taxing the unrealized capital gains from
assets such as stocks, bonds, or privately held companies of high
networth individuals.
That proposal would be a highly complicated new tax regime, creating
difficulty for a currently overwhelmed Internal Revenue Service and
complexity for taxpayers, according to the nonpartisan Tax
Foundation.
Still, analysts were skeptical of this also coming to fruition.
"The tax proposals are dead on arrival since Congress is divided, so
it is more of a political talking point for the upcoming campaign
just as tax the 1% has been in the past," said Ulf Lindahl, chief
executive at Currency Research Associates.
(Reporting by Saqib Iqbal Ahmed and Laura Matthews; Additional
reporting by Kevin Buckland and Stella QiuEditing by Megan Davies,
Jonathan Oatis and Lincoln Feast.)
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