Where rates and tax collide: Mike Dolan
© Reuters. FILE PHOTO: The Wall Street sign is pictured at the New York Stock exchange in the Manhattan borough of New York City, New York, U.S., March 9, 2020. REUTERS/Carlo Allegri/File Photo
Asset managers are now watching default rates, loan amendments and bankruptcies like hawks to see signs of stress. And the potential impact on highly levered firms from the combination of all three ups the ante for small business and private markets in the event of a recession - however delayed.Detailing multiple accounting hits to company balance sheets, investment and capital expenditure from structurally higher inflation, it twinned that with the resulting higher-for-longer real interest rate view that sees higher discounts on future earnings of inflated 'growth stock' valuations.
But it added that a shift in tax rules from 2017 that only came into full effect last year increases the conundrum, as it caps interest tax deductibility at 30% of EBIT. That means effective tax rates could theoretically soar from a fixed 21% 'to infinity' depending on the scale of added interest burdens as a share of their earnings.
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