However, Goldman Sachs is betting that Biden’s tax plan ambitions will be diluted by political reality. Republicans must oppose mass tax increases and moderate Democrats may also be cautious. Goldman Sachs is planning a smaller increase that raises the corporate tax rate to 25%. Such a more modest tax hike would create a staggering profit of just 3%, the investment bank said.
“Stock investors will soon shift the focus from raising interest rates to raising tax rates,” wrote Goldman Sachs strategists in the note.
Chamber of Commerce: Tax increases will ‘hinder’ the recovery
Prominent business groups are warning against efforts to reverse Trump’s 2017 tax cuts, which have reduced the corporate tax rate by 35%.
The Business Roundtable said it would be “actively opposing” attempts to raise taxes on companies.
“Coming out of the pandemic, raising taxes – especially to the degree that the Biden administration is proposing – would undermine any economic recovery,” Neil Bradley, executive vice president and policy director for the U.S. Chamber of Commerce, told CNN Business on Friday. -market .
Bradley applauded Biden’s focus on infrastructure as “right,” but predicted that the combination of this and tax increases will 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” tax policy in 40 years
Wall Street, however, is hardly freaking out about the potential to undo Trump’s tax cuts, which caused U.S. stocks to skyrocket in 2017 and 2018.
“The shares seem to estimate optimism about spending on infrastructure, but little concern about tax increases,” wrote Goldman Sachs strategists.
Goldman Sachs expects Biden’s next fiscal plan to include at least $ 2 trillion in infrastructure spending and could reach $ 4 trillion if it also funds health, education and other initiatives.
Given the growing US debt, Biden will be under pressure to pay for some of this ambitious spending by increasing revenue.
Raising taxes on the rich
According to Biden’s campaign proposal, those who earn more than $ 1 million a year would have to pay higher taxes on capital gains. Capital gains would be subject to the maximum marginal rate for wages and salaries – currently 37%, but increasing to 39.6% under Biden’s proposal.
Goldman Sachs hopes that Biden will be able to raise the capital gains tax rate for those who earn more, but not as high as he proposed.
The risk is that this tax hike could shake the stock market, forcing some investors to sell before the tax arrives.
In the past, these tax increases have corresponded to lower stock prices, momentum reversals and less investment in the stock market, Goldman Sachs said.
“However, all of these patterns were short-lived and reversed after the increases. We hope that any sale triggered by capital gains increases in late 2021 will be short-lived,” wrote Goldman Sachs.