Archive for June 21st, 2021
Lessons Learned from History: Corporate Tax Rates and the Stock Market
– Evan Shear, CFP® and Dale Crossley, JD, CrossleyShear Wealth Management
What has Happened to Stocks When Corporate Taxes Were Raised?
Contrary to popular belief, tax increases have historically been good for the stock market. The main proposal that has been discussed since before Biden was elected, is to return taxes to their 2016 levels, raising corporate taxes from 21% up to 28%. Recently, Biden expressed interest in forgoing the corporate tax increase in exchange for a minimum corporate tax rate of 15%. This recent change is an effort to garner support from Republicans for his infrastructure bill, but either proposal is a potential tax hike on corporations. According to BMO Capital Markets equity strategist Brian Belski, past corporate tax hikes have actually heralded positive price returns, with higher gains annually than periods when the corporate tax rate was reduced. In addition, those years reflected above-average GDP growth.
Are Overall Returns Lower When Taxes are Higher?
Taxes can be divided into three specific categories: personal, corporate, and capital gains. Large tax increases are not common across the board. In fact, Fidelity indicates that large tax increases have only occurred about 23 times in the past 70 years. 1993 was the most recent tax hike that affected all three categories, including corporate taxes.
In spite of the generally accepted idea that higher taxation results in lower returns, history shows that there is little evidence of any appreciable impact on equity market returns. As Belski indicates, as far back as 1945, the S&P 500 actually showed greater gains during years when the corporate tax rate was below 35%. It is equally important to note that the current proposed tax rate of 28% is still one of the lowest in U.S. history.
Are Earnings Lower When Corporate Tax Rates Increase?
Similarly, corporate tax rates do not tend to negatively affect company earnings. In fact, Belski states that U.S. companies have experienced significant earnings growth during periods of high corporate taxation. Since earnings growth directly affects stock prices, it is critical to note that increased corporate taxes historically do not affect company earnings, and may in fact have a positive net effect.
What This Means for Future Corporate Tax Rate Increases
While companies may rail against higher tax rates, the simple fact is that they have historically enhanced economic stability overall. Infrastructure spending and increased economic stimulus generated by higher corporate taxes is more likely to cause an increase in consumer demand for products, spurring greater company growth and increasing returns.
How Soon Can We Expect Corporate Tax Increases?
The current reduced rates are set to increase back to their 2016 levels in 2026 if Congress does not pass a tax reform bill before then. The razor-thin margins in the House and Senate make it difficult to predict if Biden's current proposed tax policies will pass into law. With the prospect of higher tax rates looming large, investors will likely continue to be concerned. However, historical data indicates that higher corporate tax rates typically have a positive effect on corporate earnings and the stock market. While higher corporate taxes may cause temporary concern for many companies, it is unlikely that they will result in significant losses or stock selloffs. Rather, companies can expect higher stock value, increased consumer spending, and greater company growth, as well as an overall healthier economy.
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