Will Kamala Harris’ plan to raise the corporate tax rate by 33% cause stock markets to decline? The story couldn’t be clearer.

In just over five weeks, voters will head to the polls or mail in their ballots to determine what path our great country will take over the next four years.

While there are aspects of fiscal management that have nothing to do with Wall Street, some laws created on Capitol Hill by elected officials have an impact on corporate America and/or taxpayers.

Perhaps the biggest question mark for Wall Street and the investing community is what might happen to corporate tax rates. While former President Donald Trump’s flagship Tax Cuts and Jobs Act permanently lowered the corporate tax rate from 35% to a historic low of 21%, current vice president and Democratic presidential candidate Kamala Harris has proposed raising the corporate tax rate by one-third up to 28%. in order to generate additional income.

The million-dollar question is: Will raising the corporate tax rate by 33% cause stocks to fall? For this answer, I’ll let history do the talking.

Kamala Harris intends to increase corporate tax rate by 33% – should investors worry?

Before we dive into the heart of what history has to say about past corporate tax increases and corporate stock responses, it’s important to understand “why” this compels Harris to propose a corporate tax increase.

With the exception of 1998–2001, the U.S. federal government has spent more than it generated in revenue every year since 1970. These nominal dollar deficits have increased over the past two decades in the wake of the dot-com bubble, the financial crisis, and the Covid-19 pandemic. In 2023, the federal deficit approached $1.7 trillion, bringing the U.S. national debt to about $35 trillion.

The cost of servicing and maintaining our national debt is rising at an alarming rate and is simply unsustainable over the long term, prompting proposals from elected officials, including presidential candidate Harris, to raise revenue and/or cut spending.

Large federal deficits have bloated the national debt. US government debt data from YCharts.

Harris’ plan to raise the corporate tax rate to 28% would play a key role in increasing federal tax revenues by an estimated $4.1 trillion between 2025 and 2034, according to an analysis by the Tax Foundation, a Washington-based think tank. Please note that these estimates cover the entire Harris tax proposal and are not based solely on rising corporate taxes.

On paper, raising the corporate tax rate seems like bad news for businesses. The higher tax rate is expected to leave less income from employment, acquisitions and innovation. But what makes sense on paper doesn’t always translate into the real world.

Fidelity’s study examined the impact of three separate types of tax increases – personal, corporate and capital gains – over roughly seven decades starting in 1950. Overall, Fidelity analysts examined 13 separate years in which at least one of these types of taxes was increased and the benchmark results were taken into account S&P500 (^GSPC -0.13%) in the calendar year preceding, during and after the tax change in question.

Since 1950, there have been five increases in the corporate tax rate: 1950, 1951, 1952, 1968 and 1993. The annual rate of return on the S&P 500 index price in these years, according to Fidelity, was 22%, 16%, 12% respectively 8% and 7%. On average, the S&P 500 has obtained 13% in the event of an increase in the corporate income tax rate.

While history can be fallible and no indicator is foolproof in predicting the short-term future, since 1950 corporate tax increases have correlated positively with stocks 100% of the time.

The bigger concern is about stocks and has nothing to do with Harris or Trump

While investors shouldn’t be too concerned about the prospect of a corporate tax increase if Kamala Harris wins in November, that doesn’t mean the stock market is doing well.

Regardless of who sits in the Oval Office in January 2025 – Kamala Harris or Donald Trump – they will inherit one of the most expensive stock markets in history.

Thanks to the rise of artificial intelligence (AI), stock split euphoria, and overall corporate profits that have exceeded Wall Street’s moderate expectations, we have witnessed a cult Dow Jones Industrial Average (^DJI 0.33%)the S&P 500 is widely followed, and growth is driven by stocks Nasdaq Composite (^ixic -0.39%)it will reach multiple record highs in 2024. But the broadest of these three indexes, the S&P 500, is making noise for all the wrong reasons.

Even though “value” is in the eye of the beholder, the Shiller S&P 500 Price to Earnings (P/E) ratio, also known as the Cyclically Adjusted Price to Earnings Ratio (CAPE Ratio), demonstrates the astonishing effectiveness of Good Work, detailing, how high valuations are today compared to the previous 150+ years.

The P/E ratio is probably the most well-known investment metric. It divides a company’s share price into trailing 12-month earnings per share (EPS) to get a number that can be compared to competitors, the broader market and history to determine whether the company is relatively cheap or expensive.

S&P 500 Shiller CAPE Ratio data by YCharts.

Meanwhile, Shiller’s P/E is based on average inflation-adjusted EPS over the last 10 years. The advantage of looking at 10 years of inflation-adjusted EPS data compared to TTM EPS is that it helps smooth out shock events (e.g., the Covid-19 pandemic) that can easily wipe out short-term valuation measures like the traditional P/E ratio ratio.

When the closing bell rang on September 26, the Shiller P/E for the S&P 500 was 36.9. This roughly matches the high of the current bull market and is more than double the average backtested reading of 17.16 through January 1871.

More concerning is the stock’s reaction after the five previous times the S&P 500’s Shiller P/E reached 30 during a bull market. While there is no rhyme or reason to how long valuations can be extended, the S&P 500, Dow Jones Industrial Average and/or Nasdaq Composite have it all at last (keyword!) lost from 20% to 89% of their value as a result of these events.

There have been only two other periods in 153 years – before the dotcom bubble burst and in late 2021 and early 2022 – when stocks were more expensive than they are today.

Although history on Wall Street doesn’t repeat itself to a T, it often rhymes. No matter what happens on November 5, investors’ biggest concern should be current stock valuations.