Key Points

  • Policymakers in major economies have pointed to 2023 as the date the stimulus payback may begin.

  • The U.K. has proposed tax hikes in 2023, the Eurozone has suggested that suspended budget rules may be reimposed, and some members of the U.S. Federal Open Market Committee believe they will begin to raise interest rates in 2023.

  • The economic headwind of rising interest rates may not slow growth until 2023.

The amount of fiscal and monetary stimulus has been record-breaking, and it has done a lot to propel the most rapid global economic rebound in history. But when do we start to pay for it, and what will the cost be to the economy as easy money starts to become tight? The good news: payback may not come until 2023, making current worries premature. The bad news: it may be hard to avoid after that.

2023 has been called out as the year of the payback by policymakers in the U.K., U.S. and Europe. While these decisions could be delayed until even later, they are unlikely to be brought forward.

Tax time in the UK

In early March, the United Kingdom’s Chancellor of the Exchequer, Rishi Sunak, proposed raising corporate taxes in 2023 to help fund some of the U.K.’s pandemic spending in Britain, after a similar proposal from U.S. Treasury Secretary Janet Yellen.

At 19%, the U.K. corporate tax rate is the lowest in the G7, and the U.S. tax rate sits at a competitive 21% (27% in the chart below which includes state taxes. While taxes hikes are far from assured, Yellen’s proposal to lift the U.S. rate by 7% gives the U.K. chancellor room to raise rates while maintaining the U.K.’s position at the bottom of the list, assuming rates in Canada, France, Germany, Italy, Spain and Japan remain at or above 25%.

Will corporate tax rates rebound?

The U.S. federal corporate income tax rate is a flat 21%. Most state and many local governments impose net income taxes. The top marginal rate generally ranges from 0% to 12%, with the mean of the top state tax rates being roughly 7.5%. A corporation generally may deduct its state and local income tax expense when computing its federal taxable income, resulting in a net effective rate of approximately 27%.
Source: Charles Schwab, KPMG data as of 3/26/2021.