Chatter has picked back up on Wall Street on the timing —and degree — of any tax increases on corporations and the wealthy by President Joe Biden amid some very ambitious fiscal stimulus plans (and soon, an infrastructure proposal).
The murmurs come in the wake of new comments by Treasury Secretary designate Janet Yellen. The former Federal Reserve chief, said in written follow-up responses Thursday to Senate Finance Committee members she would “work with” members of Congress to enact tax increases on corporations and the wealthy, according to Bloomberg.
The tax hikes would help foot the bill for Biden’s various efforts to jump start an economy jolted by the COVID-19 pandemic.
Obviously, higher taxes is the last thing an overly bullish Wall Street wants to hear right now as it would put corporate profits at risk. As most know, corporate profits are the lifeblood of stock prices.
But Apollo Global Management Chief Economist Torsten Slok says the economic impact of higher taxes arriving as the economy is trying to recover from the pandemic wouldn’t be too severe. Slok thinks the one-two punch of fiscal stimulus and inoculation from the virus would counteract the economic anchor that tends to be increased taxes.
“In isolation, higher taxes would not be good. That being said, let’s not forget the corporate tax rate went from 35% to 21% and what Biden and several of his people have been saying publicly is they expect the corporate tax rate will go up somewhere in the middle between 21% and 35%. Could that shock the economy? I would still expect if we get the economic rebound, that will create more upside both with the infrastructure spending that is potentially coming also with the potential $1,400 stimulus checks,” Slok explained on Yahoo Finance Live.
He added, “On top of that, the general trust of the fiscal expansion would probably dominate and overwhelm to the upside.”
Recall Biden put forth reversing half of former President Donald Trump’s signature tax cuts, lifting the statutory rate to 28%. Investment bank Credit Suisse estimated in the lead-up to the election this change in taxes would increase the effective rate by 4% to 5%, and slash $9 off estimated S&P 500 earnings per share. Goldman Sachs projected that Biden’s tax plan would lead it to reduce its 2021 earnings estimate by 12%.
“Biden’s tax plan could mean higher (perhaps much higher) income and investment tax, but this may not impact markets as much as many think. In fact, if markets drop it could help push Congress to pass more stimulus,” argues Carver Financial Services President Randy Carver.
Despite the threat of higher taxes under Biden, the Dow Jones Industrial Average and S&P 500 have risen an impressive 16% each since Election Day. Investors appear to have forgotten the prospect for a Biden tax increase. When Biden unveils his infrastructure plan in about a month, investors will likely be reminded that someone has to pick up the bill for it.
The question worth asking now is — will stocks be 10% lower before the plan is announced as investors readjust their profit expectation models on Corporate America?
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