However, Goldman Sachs is betting Biden’s tax plan ambitions will get watered down by political reality. Republicans are expected to oppose the tax hikes en masse and moderate Democrats may be wary, too. Goldman Sachs is penciling in a smaller hike that lifts the corporate tax rate to 25%. That more modest tax hike would create only a 3% drag on earnings, the investment bank said.
“Equity investors will soon pivot focus from rising interest rates to rising tax rates,” Goldman Sachs strategists wrote in the note.
Chamber of Commerce: Tax hikes will ‘hobble’ the recovery
Prominent business groups are warning against the effort to roll back the 2017 Trump tax cuts, which lowered the corporate rate from 35%.
The Business Roundtable said it will be “actively opposing” attempts to raise taxes on corporations.
“Coming out of the pandemic, raising taxes — especially to the degree the Biden administration is proposing — would hobble any economic recovery,” Neil Bradley, the US Chamber of Commerce’s executive vice president and chief policy officer, told CNN Business on Friday.
Bradley applauded Biden’s focus on infrastructure as “right on target,” but predicted pairing that with tax hikes will ultimately backfire.
“If you add [tax hikes] to an infrastructure bill,” he said, “all you’ve done is defeat the infrastructure bill.”
Larry Summers: This is the ‘least responsible’ fiscal policy in 40 years
Wall Street, however, is hardly freaking out about the potential of unwinding the Trump tax cuts, which sent US stocks surging in 2017 and 2018.
“Equities appear to be pricing optimism around infrastructure spending but little concern about tax hikes,” Goldman Sachs strategists wrote.
Goldman Sachs expects Biden’s next fiscal plan will include at least $2 trillion in infrastructure spending and could reach $4 trillion if it also funds healthcare, education and other initiatives.
Given surging US debt, Biden will be under pressure to pay for some of this ambitious spending by raising revenue.
Raising taxes on the wealthy
Under Biden’s campaign proposal, those earning more than $1 million a year would have to pay higher taxes on capital gains. Capital gains would be subject to the top marginal rate for wages and salaries — currently 37%, but rising to 39.6% under the Biden proposal.
Goldman Sachs expects Biden will be able to raise the capital gains tax rate for the highest earners, but not as high as he proposed.
The risk is that such a tax hike could rattle the stock market, forcing some investors to sell before the tax hits.
In the past, such tax hikes have corresponded with lower stock prices, momentum reversals and less investing in the stock market, Goldman Sachs said.
“However, all of those patterns were short-lived and reversed following the hikes. We expect that any selling triggered by capital gains hikes late in 2021 would be similarly short-lived,” Goldman Sachs wrote.