Wall Street fears impact of Harris tax plan on corporate profits

Wall Street is predicting a decline in corporate profits and the stock market if Democratic presidential candidate Kamala Harris wins in November and enacts promised tax increases.

Tax policy has become a key area of ​​focus for investors ahead of the Nov. 5 election. Republican nominee and former President Donald Trump and Harris, who debate Tuesday night, are in a statistical duel. Wealth advisors say they are answering questions from investors about how to prepare for potential changes.

“Tax policy is a huge, huge concern for investors,” said Yung-Yu Ma, chief investment officer at BMO US Wealth Management, who hears questions from clients across the country about potential tax increases. “Tax policy is something that is front and center in this election.”

Wall Street is mostly focused on corporate profits and capital gains taxes. Trump cut the corporate tax rate from 35 percent to 21 percent during his presidency, and last week he said he favored lowering it to 15 percent for companies that make their products in the U.S.

Meanwhile, Harris last month outlined plans to raise the corporate tax rate from 21 percent to 28 percent to ensure “large corporations pay their fair share” because they “often pay a lower tax rate than our teachers, nurses and firefighters.”

Goldman Sachs analysts wrote in a note last week that at Harris’ 28% rate, S&P 500 earnings would fall 5%, while Trump’s proposed cut would increase them by about 4%.

Ma said higher taxes would mean lower corporate profits and lower stock valuations. “Basically, what you have is the likelihood of a significant pullback from the stock market because of higher taxes,” Ma said.

The winner would still need congressional approval for changes to tax law. The Trump campaign said Harris’ tax plan includes a large tax hike and would increase the national debt. It did not comment on how Trump’s plan would affect the deficit.

Harris’ campaign did not immediately respond to a request for comment.

In a memo reviewed by Reuters, Brian Nelson, a senior policy adviser to the Harris campaign, said Trump’s proposal would deliver “huge tax benefits” to “billionaires and large corporations.”

Another investor concern is that the higher capital gains tax that Harris collects on profits from the sale of assets held for more than a year will cut into clients’ net profits.

The Democrat last week proposed raising the capital gains tax rate for people earning more than $1 million to 28 percent, down from President Joe Biden’s plan of 39.6 percent. Trump has not announced any plans to change the maximum of 20 percent.

“In terms of government revenue, capital gains tax increases have traditionally underperformed,” said Brian Gardner, chief Washington policy strategist at investment bank Stifel. “But it would be negative for the market overall. It’s hard to say by how much.”

Morgan Stanley said in a note last week that the correlation between capital gains taxes and stock market performance is statistically insignificant, but the tax debate could increase stock market volatility in the short term.

If capital gains taxes rise significantly, investors are likely to be more aggressive in pursuing tax-minimizing trading strategies, said a wealth manager at a major bank, who asked not to be named.

The market believes that a Trump presidency will cause inflation and the US federal budget deficit to rise, which could result in more Treasury bond issuance.

“All the models seem to assume that Trump will increase the deficit more than Harris,” said Bruce Mehlman, a partner at the nonpartisan government relations firm Mehlman Consulting.

“Businesses and corporations prefer lower taxes to higher taxes. But there is simply a common belief that sooner or later we will have a debt crisis.”

Goldman Sachs said the broader economy would get its biggest boost over the next two years if Democrats win the White House and Congress. New federal spending and expanded tax breaks for middle-income earners would be more than offset by a slight drop in investment margins caused by higher corporate tax rates, it said.

Goldman says the economy will see a decline in output next year under a Republican administration, largely because of Trump’s proposals for higher import tariffs and tougher immigration policies.

Next year, parts of the Tax Cuts and Jobs Act, signed by Trump in 2018, are set to expire. It cut taxes for both corporations and individuals, but the wealthiest households and large companies benefited disproportionately.

Trump intends to extend those cuts and has floated the idea of ​​replacing the personal income tax with tariffs. Harris has said she would leave the tax cuts only for people making less than $400,000 a year.

“The fact that the current tax law expires at the end of next year is at the heart of so many questions we get from clients,” said Nicole Webb, senior vice president of financial planning firm Wealth Enhancement. “That’s at the forefront of a lot of people’s minds.”