As the November election draws near, investors are watching closely to see how the outcome could impact the financial landscape. One of the key areas of concern for Wall Street is the potential changes to corporate tax rates proposed by current Democratic Party presidential nominee Kamala Harris.
Harris has put forth a plan to increase the corporate tax rate to 28%, a significant jump from the current rate of 21% established by former President Donald Trump’s Tax Cuts and Jobs Act. This change aims to generate additional revenue to address the growing federal deficit and national debt, which have reached alarming levels.
While on the surface, a corporate tax increase may seem detrimental to businesses, historical data tells a different story. Analysis from the Tax Foundation suggests that Harris’s proposed tax hike could boost federal revenue by $4.1 trillion from 2025 to 2034. This estimate takes into account the broader impact of her tax proposal, not just the corporate tax increase.
But how have stocks historically responded to corporate tax rate hikes? Surprisingly, data from Fidelity shows that since 1950, when the corporate tax rate has been raised, the S&P 500 has actually seen positive returns. In fact, the index has gained an average of 13% during years when the corporate tax rate increased.
While the prospect of a corporate tax hike may not be cause for concern for investors, there are other factors to consider. The current valuation of the stock market is historically high, with indicators like the Shiller price-to-earnings (P/E) ratio reaching levels that have preceded significant market corrections in the past.
The Shiller P/E ratio, which accounts for inflation-adjusted earnings over the past 10 years, is currently at 36.9 for the S&P 500. This is well above historical averages and has typically preceded market downturns in the past.
With market valuations at such elevated levels, investors may want to focus on the bigger picture rather than fixating on potential policy changes. Regardless of the election outcome, the overall health of the stock market should be a top concern for investors.
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