#MacroFriday: Harris' proposed corporate tax rate hike could diminish future US equity returns

 

On Tuesday (or Wednesday in Belgium), we watched the highly anticipated U.S. presidential election debate between Donald Trump and Kamala Harris. Today, we will not discuss statements about eating pets, executing babies, or the ‘concepts of a plan’ to replace Obamacare. Instead, we will focus on Harris’s proposal to increase the Corporate Income Tax rate.

During his presidency, Donald Trump passed the Tax Cuts and Jobs Act (TCJA) at the end of 2017. Among other tax cuts, the TCJA lowered the corporate tax rate from 35% to 21%. These measures have clearly boosted the profitability of U.S. companies, resulting in higher equity returns. The chart shows a significant jump in the dotted lines for both large and small caps in 2018, which can be largely attributed to the reduction in U.S. corporate tax rates, leading to higher corporate profits.

Some of the measures introduced alongside the TCJA are set to expire in 2025. It remains unclear how presidential candidate Harris would address these expiring measures if elected. What is clear is her intention to raise the Corporate Income Tax rate from 21% to 28%. Currently, Corporate Income Taxes in the U.S. account for 10.1% of total U.S. Federal Government revenues in 2024. This is quite low compared to both Individual Income Taxes (49.9%) and Social Security and Medicare Taxes (35.2%) as revenue streams for the federal government. Additionally, she has proposed quadrupling the stock buyback tax from 1% to 4%. Tackling the government deficit remains a major challenge (and necessity), but raising corporate taxes could weigh on corporate profits, economic growth, and stock market returns in the coming years.