However, Goldman Sachs is betting that Biden’s ambitions over tax plans will be diluted by political reality. Republicans are expected to massively oppose the tax increases and moderate Democrats can also be cautious. Goldman Sachs records a smaller increase that raises the tax rate to 25%. The modest tax increase will only cause a 3% delay in earnings, the investment bank said.
“Equity investors will soon 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 are warning against the attempt to reverse the Trump tax cuts in 2017, which lowered the corporate rate by 35%.
The Business Roundtable said it was ‘actively opposing’ efforts to raise corporate taxes.
“If you come out of the pandemic, raising taxes – especially to the extent that the Biden government is proposing – will hamper any economic recovery,” Neil Bradley, the U.S. Chamber of Commerce’s executive vice president and chief policy officer, told CNN Business on Friday. .
Bradley praised Biden’s focus on infrastructure as ‘right on target’, but he predicted that combining it with tax increases would eventually backfire.
“If you add [tax hikes] an infrastructure account, “he said,” all you did was defeat the infrastructure account.
Larry Summers: This is the ‘least responsible’ fiscal policy in 40 years
However, Wall Street is scarcely alarmed by the potential to waive the Trump tax cuts, which saw U.S. stocks rise in 2017 and 2018.
“Equity seems to be optimistic about spending on infrastructure, but little concern about tax increases,” Goldman Sachs strategists wrote.
Goldman Sachs expects Biden’s next fiscal plan to include at least $ 2 billion in infrastructure spending and $ 4 billion if it also finances health care, education and other initiatives.
Given the rising US debt, Biden will be under pressure to pay off some of this ambitious spending by raising revenue.
Raising taxes on the rich
According to Biden’s campaign proposal, those earning more than $ 1 million a year should pay higher taxes on capital gains. Capital gains are subject to the highest marginal rate for wages and salaries – currently 37%, but will rise to 39.6% according to the Biden proposal.
Goldman Sachs expects Biden to 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 cause the stock market to rattle and thus force investors to sell before the tax starts.
In the past, such tax increases have been linked to lower stock prices, momentum reversal and less investment in the stock market, Goldman Sachs said.
“However, all of these patterns were short-lived and reversed following the increases. We expect that any sales caused by capital gains increases in late 2021 would also be short-lived,” Goldman Sachs wrote.