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Biden, who has a 55 percent chance of winning the November election, according to online market and political event forecaster PredictIt, would partially reverse President Trump’s Tax Cuts and Jobs Act, and make a number of other possible changes, including a higher tax rate on capital gains and dividends for the highest earners and changes in non-tax regulatory policies.
The administration's tax reform legislation, which was enacted in 2017, lowered the U.S. corporate tax rate to 21 percent from 35 percent, which was the highest in the world. Analysis by the Tax Foundation shows Biden’s plan would hike the corporate tax rate to 28 percent.
“Extrapolating current multiples on that kind of earnings decline makes 100-150 points on the S&P 500 a baseline for the impact of a tax cut rollback, all else equal,” wrote Michael Wilson, chief U.S. equity strategist at Morgan Stanley, noting a good working assumption was a mid-single dollar impact on S&P 500 earnings.
“Of course, any impact on investor confidence that drags the multiple lower, or business investment, that drags economic growth lower could compound this effect,” he added.
The S&P 500 has rallied 43 percent off its March 23 bottom despite the U.S. economy being mired in its sharpest downturn of the postwar era. The benchmark index ended Friday’s session 6 percent below its Feb. 19 peak of 3,386 as investors look ahead toward the full reopening of the U.S. economy.
Wall Street economists see the economy contracting at an annualized rate of at least 30 percent in the second quarter after shrinking by 5 percent during the first three months of the year.
“Although the coronavirus has caused the sharpest decline in economic activity on record, in some ways tax policy represents a larger risk to earnings and consequently to equity prices,” wrote David Kostin, chief U.S. equity strategist at Goldman Sachs.
The TCJA has lowered the effective tax rate of S&P 500 companies by 8 percentage points to 19 percent and boosted S&P 500 earnings by 10 percent, according to Kostin. He noted that declining effective tax rates over the past 30 years have boosted S&P 500 earnings by 24 percent and accounted for half of the 400 basis point increase in net profit margins.
Biden, who on Friday secured enough delegates to win the Democratic nominee, “needs to be careful in talking about a big tax increase early next year,” Greg Valliere, chief U.S. policy strategist at Ontario, Canada-based AGF Investments, which has nearly $39.5 billion in assets under management, told FOX Business. “I'm not sure a tax increase is a good idea in early 2021 as the jury will still be out on the extent of the recovery.”