Will Kamala Harris’ Plan to Raise the Corporate Tax Rate by 33% Cause Stocks to Plunge? The story couldn’t be clearer.

In just over five weeks, voters will go to the polls or mail in their ballots to decide which path our great country will take in the next four years.

Although there are aspects of financial management that have nothing to do with Wall Street, some of the laws passed on Capitol Hill by elected officials do impact America’s businesses and/or taxpayers.

Perhaps the biggest question mark for Wall Street and the investing community is what might happen to corporate tax rates. While former President Donald Trump’s flagship Tax Cuts and Jobs Act permanently cut the corporate tax rate from 35% to a historic low of 21%, current Vice President and Democratic Party presidential nominee Kamala Harris has proposed raising the corporate tax rate by a third to 28%. to increase. to generate additional income.

The million-dollar question is: Will a 33% increase in the corporate tax rate cause stocks to crash? For this answer, I’ll let history speak for itself.

Kamala Harris Wants to Raise Corporate Tax Rate by 33% – Should Investors Be Worried?

Before we delve into what history has to say about previous cases of corporate tax hikes and how stocks have responded, it’s important to understand the “why” that drives Harris to propose tax hikes on corporations.

With the exception of 1998 to 2001, the federal government has spent more than it earned in revenue every year since 1970. These nominal dollar deficits have skyrocketed over the past two decades as a result of the dot-com bubble, the financial crisis, and the COVID-19 pandemic. In 2023, the federal deficit was nearly $1.7 trillion, increasing the U.S. national debt to around $35 trillion.

The costs of servicing and maintaining our national debt are rising at an alarming rate and are simply unsustainable in the long term, necessitating proposals from elected officials, including presidential candidate Harris, to increase revenues and/or cut spending.

Large federal deficits have driven up national debt. US national debt data from YCharts.

Harris’ plan to increase the corporate tax rate to 28% would play a critical role in increasing federal tax revenue by an estimated $4.1 trillion from 2025 to 2034, according to an analysis by the Tax Foundation, a Washington, D.C.-based think tank. increase dollars. Keep in mind that this estimate includes the entire Harris tax proposal and is not based solely on an increase in corporate taxation.

Raising the corporate tax rate seems, on paper, to be bad news for businesses. A higher tax rate is likely to leave less income for hiring, acquisitions and innovation. But what makes sense on paper doesn’t always translate to the real world.

A Fidelity study analyzed the impact of three different types of tax increases – personal, corporate and capital gains – over a period of about seven decades, starting in 1950. In total, Fidelity analysts examined 13 different years in which this occurred At least one of these types of taxes increased and took into account the performance of the benchmark S&P 500 (^GSPC -0.13%) in the calendar year before, during and after the relevant tax change.

Since 1950, there have been five instances in which the corporate tax rate was increased: 1950, 1951, 1952, 1968 and 1993. The annual return for the S&P 500 in those years was 22%, 16%, 12%, according to Fidelity. , 8% and 7% respectively. On average, the S&P 500 has won 13% if the corporate tax rate increases.

While history can be fallible and no metric is foolproof when it comes to predicting the short-term future, corporate tax increases since 1950 have shown a positive association with stocks 100% of the time.

There are bigger worries for stocks, and it has nothing to do with Harris or Trump

While investors shouldn’t be too worried about the prospect of a corporate tax hike if Kamala Harris wins in November, that doesn’t mean the stock market is safe.

Regardless of who claims the Oval Office in January 2025, Kamala Harris or Donald Trump, they will inherit one of the most expensive stock markets in history.

Thanks to the rise of artificial intelligence (AI), stock-split euphoria, and overall corporate earnings beating Wall Street’s muted expectations, we’ve seen the iconic Dow Jones Industrial Average (^DJI 0.33%)widely followed the S&P 500 and was driven by growth stocks Nasdaq Composite (^IXIC -0.39%)climbing to multiple record closing highs in 2024. But the broadest of these three indexes, the S&P 500, is making noise for all the wrong reasons.

Although “value” is in the eye of the beholder, the S&P 500’s Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted price-to-earnings (CAPE) ratio, performs remarkably well managed to explain in detail how inflated valuations currently are compared to over 150 years ago.

The P/E ratio is probably the most well-known investment ratio. It involves dividing a company’s share price into its trailing 12-month earnings per share (EPS) (TTM) to produce a number that can be compared to competitors, the broader market and history to determine whether a company is relatively cheap or expensive.

S&P 500 Shiller CAPE Ratio data from YCharts.

The Shiller P/E ratio is based on the average inflation-adjusted earnings per share over the last ten years. The advantage of looking at 10-year inflation-adjusted EPS data as opposed to TTM EPS data is that it smoothes out shock events (e.g. the COVID-19 pandemic) that can easily confuse short-term valuation measures such as the traditional P/E ratio Relationship.

When the closing bell rang on September 26th, the S&P 500’s Shiller P/E ratio was 36.9. This is more or less the peak of the current bull market rally and is more than double the average value of 17.16 going back to January 1871.

What’s even more concerning is how stocks are reacting after the last five times the S&P 500’s Shiller P/E was above 30 during a bull market. While there is no rhyme or reason to how long valuations can last, the S&P 500, the Dow Jones Industrial Average and/or the Nasdaq Composite certainly do ultimately (Keyword!) lost between 20% and 89% of their value as a result of these events.

In 153 years, there have only been two other periods – before the dot-com bubble burst and late 2021/early 2022 – when stocks were more expensive than they are now.

While history doesn’t repeat itself in the shape of a “T” on Wall Street, it often rhymes. Regardless of what happens on November 5th, current stock valuations are likely to be the biggest concern for investors.