The federal government is on track to continue a spending spree that’s injected trillions of dollars into the economy, but investors may soon be bracing for the T-word.
The past week saw the tech-heavy Nasdaq Composite COMP, +1.24% slip 0.58%, leaving it up just 1.94% for the year. The S&P 500 SPX, +1.66% saw a weekly rise of 1.57%, while the Dow Jones Industrial Average DJIA, +1.39% edged up 1.36%. The S&P 500 remains up 5.82% for the year, while the Dow is up 8.06%.
The Biden administration has yet to roll out a full-fledged plan for infrastructure spending or any accompanying tax increases. During the presidential campaign, Biden called for raising the corporate tax rate on domestic income to 28%, while also raising the tax rate on foreign income, known as the GILTI tax, and instituting a minimum corporate tax rate.
David Lefkowitz, head of equities Americas at UBS Financial Services, undertook a similar exercise. He also penciled in a corporate tax rate of 25%, which he estimated would be a 4% drag on 2022 earnings. Speculation around the Biden administration’s infrastructure plan is building. News reports in the past week said officials are putting together an infrastructure and economic package that could cost as much as $3 trillion. The Wall Street Journal reported that House Speaker Nancy Pelosi, D-California, earlier this month said raising the corporate tax rate and increasing taxes on capital gains were possible options.
Historically, “changes in the capital gains tax rate have had almost no impact on overall market returns,” Lefkowitz wrote. “In fact, the last time the capital gains tax rate increased , the S&P 500 rose about 30%. And capital gains tax rates have very little relationship with valuations.”Skilled managers could already begin assessing which companies would be affected most by changes in the tax code, allowing them to shift portfolio positions.
An addition to the 'are taxes bad for prosperity' debate...
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