If You Were a Billionaire, You’d be Mad!

Leading up to this years G7 Summit, ministers from all over the world are showing support for an overhaul of today’s multinational corporate tax laws. (The G7 is an event for the biggest leaders in the world… and their finance nerds)

The problem: For years and years, it has been common practice for multinational corporations to evade taxes. The most common way is by funneling money through countries with lax financial regulation or low corporate tax rates. If you have ever seen Ozark, you know about ‘shell’ companies and how they are essentially business skeletons that are good for nothing other than passing money through. Across the world, it is estimated that 40% of foreign direct investment is “phantom” – money that is passing through empty corporate shells with no real business purpose. Luxembourg, for example, is a country of 600k people with the same amount of foreign direct investment as the United States… smells a little fishy.

In an attempt to make companies pay their fair share of taxes, leaders of the G7 are showing support of a minimum 15% global corporate tax rate. Meaning that regardless of what country money is “earned in”, the company will pay a minimum 15% corporate tax on it. You would think that most would recognize that its in the best interest of the economy and the people of each country to make this change, right? WRONG!

Unfortunately, politicians all over the world are having their pockets lined with money from corporations who are not a big fan of the corporate tax rates increasing. Many of these companies have teams devoted to finding tax loopholes. This is why something of this nature has not passed in the past and why it will be such a groundbreaking achievement if implemented successfully.  But, in addition to politicians and business leaders, there are some countries who would gladly forego the tax benefit, like Ireland. Ireland has taken advantage of the companies around the world who are looking to pay less in taxes by allowing them to pay 12%. This sparked a massive increase in Irish remote workers as well as generated billions in tax revenue.

We will see what comes of the G7 but in the past, it has shown that these multinational companies have a lot stronger hold on politicians that we would like to believe.

The Rates

Mortgage Backed Securities closed yesterday at the same place that they did on Friday. This morning they are up 8 bps. However, we believe they will take a dive on Thursday after the CPI reading comes out showing inflation. We have been talking about this for months – year over year inflation readings are exaggerated due to the economic shutdown last year. But for some reason, the market continues to act blindsided when these numbers come out. We are expecting to see core inflation at 3.5% or above on Thursday – 75% over the Feds “target”. Remember that the Fed’s target is an annualized rate so you cannot just look at one month. Just like last month, the market will likely overreact. We are holding a locking bias going into Thursday’s reading.