However, Goldman Sachs bets that the ambitions of Biden’s fiscal plan will be watered down by political reality. Republicans are expected to massively oppose the tax increase, and moderate Democrats could also be cautious. Goldman Sachs creates lower growth, raising the corporate tax rate to 25%. This more modest tax increase would only create a 3% reduction in revenue, the investment bank said.
“Equity investors will soon focus on raising interest rates to raising tax rates,” Goldman Sachs strategists wrote in the note.
Chamber of Commerce: tax increases will “hinder” recovery
Prominent business groups warn against the effort to return to the 2017 Trump tax cuts, which reduced the corporate rate from 35%.
The business roundtable said it would “actively oppose” attempts to raise corporate taxes.
“Getting out of the pandemic, raising taxes – especially as the Biden administration proposes – would prevent any economic recovery,” Neil Bradley, executive vice president and political director of the US Chamber of Commerce, told CNN Business on Friday. .
Bradley applauded Biden’s focus on infrastructure as “target”, but predicted that the association with tax increases would eventually have a negative effect.
“If you add [tax hikes] to an infrastructure bill, “he said,” all you have to do is beat the infrastructure bill. “
Larry Summers: This is the “least responsible” fiscal policy of the last 40 years
However, Wall Street is not afraid of the potential to disappoint Trump’s tax cuts, which caused US stocks to rise in 2017 and 2018.
“The shares appear to be optimistic about prices in terms of infrastructure spending, but they are not worried about tax increases,” Goldman Sachs strategists wrote.
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 finances health care, education and other initiatives.
Given the increase in US debt, Biden will be pressured to pay off some of these ambitious expenditures by raising revenues.
Raising taxes on the rich
According to Biden’s campaign proposal, those who earn more than $ 1 million a year should pay higher taxes on capital gains. Capital gains would be subject to the higher marginal rate for wages and salaries – currently 37%, but increase to 39.6% according to the Biden proposal.
Goldman Sachs expects Biden to be able to raise the capital gains tax rate for the biggest winners, but not as high as it has proposed.
The risk is that such a tax increase could shake the stock market, forcing some investors to sell before the tax begins.
In the past, such tax increases have been matched by lower stock prices, momentum reversals and fewer investments in the stock market, Goldman Sachs said.
“However, all of these patterns were short-lived and reversed after the increases. We expect any sales triggered by capital gains increases at the end of 2021 to have a similar duration,” Goldman Sachs wrote.