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Overnight, several media outlets reported that the White House is considering abandoning plans to raise the corporate and top individual tax rates, in response to opposition from Sen. Sinema (D-Ariz.).

As Goldman’s chief political economist Alec Phillips writse today, the news here “is not her position against tax rate increases, which has been known and reported on for some time. Instead, it is that her position has not changed” and that the White House is considering alternatives in an effort to reach a deal by late next week, before (1) the President leaves for Europe (Oct. 29), (2) a potential House vote on the infrastructure bill (by Oct. 29), and (3) the Virginia gubernatorial election (Nov. 2).  

Looking at prediction markets, Goldman notes that there has been a shift in the consensus expectation, with the odds of any increase in the corporate rate this year declining from around 70% on average over the last week to around 63% today, while the odds of an increase to more than 24.5% declining more sharply, from nearly even odds over the last week to 22% today.

Taking a step back, the Washington strategist notes that since the start of 2021, Goldman had has expected Congress to increase the corporate rate to 25% next year from 21%, raising around $400bn over ten years, and he still thinks the corporate rate is more likely than not to rise; indeed a higher corporate tax rate has long been one of Goldman’s biggest bear cases for stocks.

Asked moments ago if spending bill can be paid for without raising taxes on corporations, Manchin responded “oh no they’re going to pay. they’re going to pay. …everybody has to pay their fair share”

Manchin, asked if spending bill can be paid for without raising taxes on corporations:

“oh no they’re going to pay. they’re going to pay. …everybody has to pay their fair share”

(then zooms off in car)

— Jordain Carney (@jordainc) October 21, 2021

To put the corporate rate increase in context, the House Ways and Means Committee’s proposal to pay for the “Build Back Better Act” (BBBA) would have generated nearly $3 trillion in budgetary savings – a little more than $2.2 trillion in tax increases, and around $700bn in drug pricing reductions.  Of the tax increases, a 26.5% corporate rate would raise $540bn over 10 years, the 39.6% top individual rate in that package would raise another $170bn/10yrs and the 25% capital gains rate would raise $123bn/10yrs. A 3% surtax on income over $5mn would raise another $127bn/10yrs.  Altogether, those tax rate increases would raise around $1 trillion/10yrs in revenue.

Assuming that the eventual cost of the package shrinks to around $2 trillion – as is now the consensus – there is theoretically room to drop some of these tax rate increases and still have enough savings to cover the cost of the bill. However, it is unclear whether congressional Democrats can count on all of those other provisions, either. Drug pricing changes are likely to make it into the final bill, but we would expect less than half of the $700bn savings they current generate (around $130bn in savings from delaying an already-delayed Trump Administration policy, and another $100-200bn from Medicare-related savings). Proposed estate tax changes seem unlikely ($82bn), and it is unclear whether there will be sufficient support to repeal the deduction for pass-through income ($78bn).

Meanwhile, Goldman warns that other things could make their way into the bill.

Among these are increased requirements for bank information reporting to the IRS ($463bn/10yrs, according to the Treasury), changes to partnership rules ($172bn, according to the Senate Finance Committee), or a 2% tax on buybacks that Senate Finance Committee Chairman Wyden (D-Ore.) has proposed (potentially $100-150bn/10yrs assuming corporate profits grow as CBO projects and buybacks run at the current ratio to profits). Regarding buybacks, Democrats could always consider Sen. Rubio’s (R-Fla.) proposal to tax buybacks as deemed dividends to shareholders, which could potentially raise more revenue than the excise tax approach.

Another clear possibility is to further tighten the international tax changes already in the House-proposed bill. The White House proposed more than $1 trillion/10yrs in cross-border tax increases in its budget earlier this year, but the House Ways and Means Committee raises only $340bn from these policies because most of them are scaled back from the original.

That said, Phillips concludes that all these changes are all fairly complicated “and once lawmakers look through all of these alternatives, it would not be surprising to see them return to the idea of at least incrementally raising corporate tax rates, after all.”