However, Goldman Sachs is betting that the ambitions of Biden’s tax plan will be watered down by political realities. Republicans are expected to oppose the tax increases en masse, and moderate Democrats can also be wary. Goldman Sachs is working on a smaller increase that will bring the corporate tax rate to 25%. That more modest tax hike would only negatively impact revenues by 3%, the investment bank said.
“Equity investors will soon shift focus from rising interest rates to rising tax rates,” Goldman Sachs strategists wrote in the note.
Chamber of Commerce: Tax increases will ‘hinder’ recovery
Prominent business groups warn of the attempt to reverse Trump’s 2017 tax cuts, lowering the corporate rate of 35%.
The Business Roundtable said it will “actively oppose” attempts to increase taxes on businesses.
“If we come out of the pandemic, raising taxes – especially to the extent that the Biden administration proposes – would hinder any economic recovery,” said Neil Bradley, executive vice president and chief policy officer of the US Chamber of Commerce. Commerce Friday on CNN Business.
Bradley hailed Biden’s focus on infrastructure as “right on target,” but predicted that linking tax increases will eventually backfire.
“If you add [tax hikes] against an infrastructure law, ”he said,“ all you’ve done is beat the infrastructure law. “
Larry Summers: This is the “least responsible” tax policy in 40 years
However, Wall Street is hardly concerned about the potential of reversing Trump’s tax cuts, which saw U.S. stocks surging in 2017 and 2018.
“Stocks appear to be praising optimism about infrastructure spending, but little concern about tax increases,” 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 the rising US debt, Biden will come under pressure to pay for some of this ambitious spending by increasing revenues.
Increase taxes for the rich
According to Biden’s campaign proposal, those who earn more than $ 1 million a year should pay higher taxes on capital gains. Capital gains would be subject to the highest marginal rate for wages and salaries – currently 37%, but rising to 39.6% under Biden’s 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 suggested.
The risk is that such a tax increase could rattle the stock market, forcing some investors to sell before the tax hits.
In the past, such tax increases corresponded to lower stock prices, momentum reversals and less investment in the stock market, Goldman Sachs said.
“However, all those patterns were short-lived and reversed after the increases. We expect any sale due to capital gains gains to be equally short-lived by the end of 2021,” Goldman Sachs wrote.