While business leaders warn of the risks of a corporate tax hike, the world’s largest wealth manager is decidedly unfazed. The resurgent US economy can handle it, BlackRock manager Rick Rieder told CNN Business.
The White House is laying the groundwork for raising the corporate tax rate above its current level of 21% to help fund an ambitious infrastructure package. The business community is warning that a business tax hike, the first since 1993, would jeopardize recovery from the pandemic.
But Rieder, BlackRock’s chief investment officer for global fixed income, doesn’t think pulling back the Trump tax cuts will weaken the economy – it could actually have a positive impact on growth.
“I think 21% is too low,” said Rieder in an interview. He pointed out how many companies used their tax savings to buy back shares to prove that the business benefits were “too high”.
During the 2020 campaign, Joe Biden proposed raising the corporate tax rate to 28%, which is still below the pre-Trump level of 35%. Earlier this week, White House press secretary Jen Psaki said the president believes “the front runners are not doing their part” and “obviously corporations could pay higher taxes”.
Rieder said the US economy could “definitely” withstand higher corporate taxes, and suggested that an increase in the corporate tax rate could help distribute economic profits more evenly between companies and workers.
“The US economy is amazingly resilient,” he said, “and it will do well indeed if you get some of that income redistribution and income in an easier and better place, especially for those on lower and middle incomes.”
Pay off a mountain of debt
Last week, the Business Roundtable, a powerful alliance of CEOs, warned that a rise in the corporate tax rate would make US companies uncompetitive on the world scene once the recovery picks up pace.
“The roundtable will actively speak out against efforts to increase corporate taxes,” said Josh Bolten, CEO of the group, during a press conference.
But BlackRock’s Rieder suggested these concerns are exaggerated and not responsible for additional tax revenues after Washington amassed trillions in debt to fight the pandemic.
Rieder said a modest increase in the corporate rate “doesn’t really hurt corporate cash flows” and “allows us to maintain a lower debt profile across the country”.
The Fed could start tapering very soon
Economists have improved their US GDP projections since Congress passed Biden’s $ 1.9 trillion stimulus package. Rieder shares this optimism and predicts that the US economy will grow by an average of 7% this year – a pace not seen since 1984.
“I think it will surprise people upstairs,” said Rieder. “You will see pretty booming growth for the economy.”
He added that “it has been a really long time” since he became optimistic about the US economy.
Forecasts of an economic boom are putting pressure on the Federal Reserve to reduce its emergency stance – before it overheats the economy. Not only are interest rates zero, but the Fed is still buying $ 120 billion worth of bonds every month.
Rieder assumes that the Fed will start reducing its asset purchases in September. This news could come on Wednesday.
“I think they should start restricting the programs soon,” he said.
Rieder added that he expects the Fed to hike lows next year. This is well ahead of the latest Fed forecasts. In December, well before the Biden stimulus plan and the accelerated rollout of vaccines, most Fed officials signaled that the central bank would not raise rates until 2024.
Withdrawal plans from the Fed could scare investors accustomed to extremely low interest rates. But Rieder pushed these concerns aside.
“It won’t harm the economy. In fact, in many ways, it helps consumers and savers,” he said.
Outlier inflation? Not so fast
The signal for an end to politics in this time of crisis will also help the Fed keep inflation in check.
“As a central bank, you don’t want to fight from behind to contain inflation. It is much more effective to be up front and set the plan.”
Inflation is the top fear among portfolio managers polled by Bank of America today. It is the first time since February 2020 that Covid is not the most frequently mentioned risk in the survey.
The big concern is that runaway inflation like that of the 1970s will force the Fed to hike interest rates quickly, wiping out the economic recovery.
While Rieder sees an acceleration in inflation, perhaps to 2.5% yoy, he is not concerned about “explosive” price gains.
“I don’t think inflation will run away at all,” he said. “In fact, I think the cultural differences between inflation and the 70s and 80s are huge.”
In particular, he pointed to the role of technology in keeping everything from Amazon and Uber to cloud computing in control of prices.
“The way people spend money, shop and find better prices,” said Rieder. “In addition, we no longer operate a raw material-oriented manufacturing industry.”