Two Certainties: Taxes And Pipeline Inflation

Generally buoyant PMIs out of Europe helped brighten the mood at the margins on Friday, and a US proposal for a 15% global corporate minimum tax was plastered all over the front pages.

The Biden administration is bent on curbing what Janet Yellen derisively calls a “race to the bottom” for corporate taxes. Finance ministers from Germany, France and Japan welcomed the 15% proposal, which they called “progress.”

This is a somewhat maddening debate. Most rational people seem to agree that it isn’t optimal for corporations and the world’s wealthiest people to venture near, far (“wherever you are”) in an effort to minimize their tax burdens, availing themselves of every opportunity to save a penny along the way.

And yet, when it comes to the notion of a coordinated, global tax regime (whether in the form of a global corporate minimum rate or a global wealth tax applied to individuals) many everyday people in advanced economies cringe, as though such affronts to unrestrained capitalism “will not stand, man.” Never mind the fact that when corporations and the wealthy dodge their obligations (legally or otherwise), it falls to the middle- and upper-middle class to backfill the resulting hole in the tax base.

(If you worked for decades to build a prosperous small business and managed to become a small-time millionaire, why should you have to pay more in taxes to cover what Amazon or some hedge fund billionaire got away with not paying? Oh, you shouldn’t? I’m glad you agree. Maybe keep that in mind when you’re tempted to adopt a cadence that suggests you’re a Davos invitee.)

In any event, these discussions will continue and a few lines from Bloomberg’s coverage underscored some of the irony and hypocrisy already on display. “Some lower-tax countries — such as Ireland, with a 12.5% corporate rate — had been skeptical of the 21% rate the Biden administration has urged Congress to enact for global income earned by US companies,” an article said, adding that “British officials have also worried that the 21% rate was too high for the long term — even though the UK intends to raise its corporation tax to 25% in 2023 to replenish public finances after the pandemic.”

Switching gears, PMIs out of Europe Friday suggested the lifting of some lockdown measures is bolstering services, while inflation pressures appear to be building.

In France, the flash read on IHS Markit’s services gauge was 56.6 for May, above the expected 53 and ahead of the most optimistic estimate. Germany’s print (52.8) was a slight beat. At 55.1, the eurozone services gauge now sits at the highest in nearly three years.

Europe is still playing catch up with the US (figure above), where PMIs were due later Friday.

On the manufacturing side, Markit’s gauge for France beat (59.2 versus an estimated 58.5), but the preliminary read for Germany missed (64 versus consensus 65.9).

The color accompanying the German survey will sound familiar. “The severity of the supply chain issues facing manufacturers was underlined by some 79% of surveyed goods producers reporting delays in the receipt of inputs – a new record for the survey,” IHS Markit remarked, adding that “supply shortages in turn drove a further surge in manufacturing purchase prices, which rose at the fastest rate since the start of data collection in 1996.”

The read-through from that should be obvious, but just in case, the survey drove home the point. “Led by an unprecedented increase in factory gate prices, average prices charged by German businesses showed the steepest rise since comparable data were first available,” the color noted. “The survey also revealed a growing willingness among services firms to increase charges, with output prices in the tertiary sector rising to the greatest extent since November 2019.”

Phil Smith, Associate Director at IHS Markit, commented at length on the situation. The trend in factory input prices, he said, “easily surpassed” anything witnessed over the past quarter century. Measures of input costs and output prices in the German services sector are both at records. “The survey suggests that the surge in operating expenses is having implications for staff recruitment,” Smith cautioned.

For now, he expressed confidence that robust demand and backlogs will predispose firms to adopting “a positive attitude towards hiring.” For now.

Europe, you’ll recall, fell into a double-dip recession last quarter (figure below).

“After two quarters of contracting GDP, the second quarter of 2021 will likely show firm growth on the back of reopening economies and strong consumer demand,” ING ventured, in a Friday note.

“Pipeline inflation pressures are on the rise too with shortages emerging and demand returning,” the bank went on to say, adding that “for services, inflation is lagging, but as reopenings happen, we expect services inflation to trend higher as well, if only to make up for declines seen over 2020, but probably more than that.”