The presidential hopefuls for 2024 have very different ideas about how to tax businesses. If these ideas are put into action, they could have a big effect on the stock market.
That’s what a new report from Goldman Sachs analysts lead by Ben Snider says.
The Penn Wharton Budget Model says that raising the company tax rate to 28% would cut the federal budget deficit by $1 trillion over the next ten years. That’s what Democratic presidential nominee Kamala Harris said last month.
Getting rid of the debt might mean that companies make a lot less money, though.
Goldman Sachs analysts think that the profits per share in the S&P 500 SPX -0.30% would drop by a little less than 1% for every percentage point that the corporate tax rate goes up.
As a result, Harris’s plan would have major effects on the index, since Goldman estimates that raising the top corporate tax rate from 21% to 28% would cause the S&P 500 to make 5% less.
Analysts said that more changes to the alternative minimum tax for businesses and taxes on foreign income would cut earnings by 8%.
Snider wrote, “The proposed tax changes could directly change S&P 500 earnings by 5% to 10%.” He also said that the upper limit of this estimate could be reached if the changes led to less “economic activity.”
The Tax Foundation, which supports low taxes, says that raising the corporate tax rate to 28% would cut the U.S. GDP by 0.6% over the long term. This is expected to hurt corporate profits as well.
On the other hand, Goldman analysts say that Donald Trump’s plan to lower the business tax rate to 15% would boost earnings for the S&P 500 by 4%, but it would also add $595 billion to the federal budget deficit, according to Penn Wharton.
Penn Wharton said that Harris also wants to raise the tax on corporate buybacks from 1% to 4%. This would bring in an extra $265 billion over 10 years and almost get rid of the tax break that companies get for using buybacks instead of dividends to give money back to owners.
“The excise tax does not change reported earnings,” Snider of Goldman Sachs wrote. “But the extra cost represents an incremental headwind to share repurchases.”
Since share buybacks have “represented the largest source of demand for U.S. stocks in most years,” he also said that the move could make U.S. stock prices go down.
Most people who study taxes say that the federal government will have to raise taxes in the next few years to keep popular programs like Social Security and Medicare from being cut much more deeply. Neither the Harris nor the Trump campaigns are ready to suggest raising taxes on people who make more than $400,000. This means that higher corporate rates are a clear way to find new money.
The people in charge of these retirement plans think that Social Security and Medicare will run out of money by the middle of the next decade. If new money sources aren’t found, benefits will have to be cut.
