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US Election Risk: Corporate Tax Rates
The passage of the Tax Cut and Jobs Act (“TCJA”) in December 2017 lowered the US federal corporate income tax rate to 21% from 35%.
This recent decline in tax rate has been a major contributing factor to profit growth for US companies. For example, S&P Global found that, since the TCJA was enacted, the median effective tax rates for information technology companies in the S&P500 dropped from 21.1% in the first quarter of 2017 to 15.5% in the same period of 2019.
However, Democratic nominee and former Vice President Joe Biden has proposed a partial reversal of the TCJA. The Tax Foundation sees the plan as raising the corporate income tax rate to 28%, reversing half of the TCJA cut.
With the 2020 US Presidential Election just five months away and prediction markets starting to price in an increased likelihood of Democratic victories in the House, Senate and Presidential races, it may be worthwhile considering if the market is pricing in the risk of an increase in tax rates.
Data source: Predictit.org “Yes Price”
In a note earlier this week, Goldman Sachs strategists saw the plan put forward by Democratic nominee Biden as reducing S&P 500 EPS by as much 12% in 2021, while this week has also seen the index trading with a forward PE multiple above 23, levels last seen around the time of the dotcom bubble.
Of course, much uncertainty remains about the specifics of any potential tax reform, as well as five more months of uncertainty before the election race is completed, which could ultimately remove the likelihood of any tax reform.