Goldman Sachs: Joe Biden’s tax hikes won’t be as big as he wants

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Biden campaigned to lower the corporate rate from 21% to 28%, raise taxes on foreign income and institute a minimum corporate tax rate.

However, Goldman Sachs is betting that Biden’s tax plan ambitions will be watered down by political reality. Republicans are expected to oppose tax hikes en masse, and moderate Democrats might be wary as well. Goldman Sachs is considering a more modest hike that takes the corporate tax rate to 25%. This more modest tax hike would weigh just 3% on profits, the investment bank said.

The comments show how attention on Wall Street is shifting from Biden’s $ 1.9 trillion US bailout and reopening of the US economy to how Washington will pay for a massive infrastructure package.

“Equity investors will soon go from rising interest rates to rising tax rates,” Goldman Sachs strategists wrote in the note.

Chamber of Commerce: tax increases will “ hamper ” the recovery

Leading business groups are warning of efforts to reverse Trump’s 2017 tax cuts, which lowered the corporate rate by 35%.

The business roundtable said it would “actively oppose” attempts to raise corporate taxes.

“Coming out of the pandemic, raising taxes – especially to the extent proposed by the Biden administration – would hamper any economic recovery,” Neil Bradley, executive vice president and chief policy officer of the House, told CNN Business on Friday. of American trade. .

Bradley applauded Biden’s emphasis on infrastructure as being “right on target,” but predicted that the pairing with tax hikes would ultimately backfire.

“If you add [tax hikes] to an infrastructure bill, ”he said,“ all you did was defeat the infrastructure bill ”.

Larry Summers: This is the ‘least responsible’ fiscal policy in 40 years

Wall Street, however, is hardly panicking about the potential for unwinding of Trump’s tax cuts, which boosted U.S. stocks in 2017 and 2018.

“Stocks seem to be pricing optimism about infrastructure spending, but not caring about tax hikes,” Goldman Sachs strategists wrote.

After Biden's relaunch, US economic growth could rival that of China for the first time in decades
Rick Rieder, BlackRock’s chief investment officer for global fixed income, told CNN Business last week that the US economy “certainly” can withstand higher corporate taxes. “I think 21% is too low,” Rieder said.

Goldman Sachs expects Biden’s next budget plan to include at least $ 2 trillion in infrastructure spending and could reach $ 4 trillion if it also funds health care, education and others initiatives.

Given the skyrocketing US debt, Biden will be under pressure to pay off some of these ambitious expenses by increasing his income.

Over the weekend, Larry Summers, who advised the two previous Democratic administrations, warned that the United States was suffering from the “least responsible” fiscal policy in 40 years.

Raise taxes for the rich

To increase income, Biden proposed to increase taxes on the wealthy. Those who earn more than $ 400,000 “will see a small to significant tax increase,” Biden told ABC News last week.

According to Biden’s campaign proposal, those who earn more than $ 1 million a year should pay higher capital gains taxes. Capital gains would be subject to the highest marginal rate for wages and salaries – currently 37%, but rising to 39.6% under the Biden proposal.

Here's how Biden wants to raise taxes for the rich and corporate

Goldman Sachs expects Biden to be able to raise the capital gains tax rate for the highest earners, but not as high as he has proposed.

The risk is that such a tax hike could shake up the stock market, forcing some investors to sell before taxes hit.

In the past, these tax hikes have been associated with lower stock prices, momentum reversals and less investment in the stock market, Goldman Sachs said.

“However, all of these patterns have been short lived and reversed after the hikes. We expect any sales triggered by capital gains hikes at the end of 2021 to be similarly short-lived,” Goldman Sachs wrote.

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