Kamala Harris's corporate-tax plan could cut S&P 500 earnings by 5%: Goldman Sachs

By Chris Matthews

But new tax revenue is needed to avoid cuts to Social Security and Medicare, analysts say

The candidates in the 2024 presidential election have presented starkly different visions for corporate taxation - and if implemented, they could have a major impact on the stock market.

That's according to a new report from Goldman Sachs analysts, led by Ben Snider.

Democratic presidential nominee Kamala Harris said last month that she would support raising the corporate tax rate to 28%, a move that would reduce the federal budget deficit by $1 trillion over the next decade, according to the Penn Wharton Budget Model.

That deficit reduction could come at the price of sharply lower corporate earnings, however.

Goldman analysts estimate that every percentage-point increase in the corporate tax rate would reduce the earnings per share in the S&P 500 SPX by a little less than 1%.

Harris's proposal, then, would have serious implications for the index, as raising the top corporate tax rate to 28%, from the current 21%, would likely reduce S&P 500 earnings by 5%, per the Goldman estimate.

Additional changes related to the corporate alternative minimum tax and taxes on foreign income would reduce earnings by 8%, the analysts noted.

"The proposed tax changes could directly shift S&P 500 earnings by 5% to 10%," Snider wrote, adding that the upward bound of this estimate could be reached if the changes resulted in reduced "economic activity."

The low-tax advocates at the Tax Foundation estimate that raising the corporate rate to 28% would reduce long-run U.S. GDP by 0.6%, which would likely also crimp corporate profits.

On the other hand, Goldman analysts estimate that Donald Trump's proposal to lower the corporate tax rate to 15% would increase S&P 500 earnings by 4%, while also increasing the federal budget deficit by $595 billion, according to Penn Wharton.

Harris also supports raising the tax on corporate buybacks from 1% to 4%, which would raise $265 billion over 10 years and nearly eliminate the tax preference for buybacks over dividends as a means for corporations to return money to shareholders, Penn Wharton said.

The excise tax "does not affect reported earnings, but the additional cost represents an incremental headwind to share repurchases," Goldman's Snider wrote.

The move could also weigh on U.S. stock valuations given that share buybacks have "represented the largest sourse of demand for U.S. stocks in most years," he added.

Most tax analysts say the federal government will need to raise taxes in the coming years to avoid sharp cuts to popular programs like Medicare and Social Security. Neither the Harris nor Trump campaigns are willing to propose tax increases on Americans earning $400,000, making higher corporate rates an obvious place to look for new revenue.

The trustees for these retirement programs estimate that Social Security and Medicare will be insolvent by the middle of the next decade, which would force benefit cuts if new sources of revenue aren't found.

-Chris Matthews

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09-05-24 1355ET

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