Investing.com -- Wall Street is bracing for a potential impact on corporate earnings and the stock market if Democratic presidential candidate Kamala Harris wins the November election and follows through on her proposed tax increases, Reuters reported on Tuesday.
With tax policy emerging as a concern for investors, it is at the forefront of discussions leading up to the Nov. 5 vote. Republican candidate Donald Trump and Harris are in a tight race, with many investors and wealth advisers preparing for possible tax changes.
Tax policy has become a major concern for investors, as per Yung-Yu Ma, Chief Investment Officer at BMO (TSX:BMO) U.S. Wealth Management.
The brokerage has been fielding numerous questions from clients nationwide regarding potential tax hikes, as Ma emphasized that tax policy is a key issue in the upcoming election, the report added.
Of particular interest to Wall Street are corporate earnings and capital gains taxes. During his presidency, Trump reduced the corporate tax rate from 35% to 21% and has recently suggested lowering it further to 15% for companies producing goods in the U.S. Harris, in contrast, has outlined a plan to raise the corporate tax rate to 28%, ensuring that large corporations "pay their fair share."
Goldman Sachs (NYSE:GS) estimated that Harris' proposed tax hike could reduce S&P 500 company earnings by 5%, while Trump's plan could boost them by around 4%.
Ma added that higher taxes would likely lead to lower corporate profits and stock valuations, potentially triggering a market pullback.
Any changes to tax policy, however, would still require congressional approval. Trump's campaign has criticized Harris' tax plan as a massive tax hike that would add to the national debt, while Harris' camp, represented by senior policy advisor Brian Nelson, countered that Trump's proposals would disproportionately benefit billionaires and large corporations.
Investors are also concerned about the potential rise in capital gains taxes. Harris has proposed raising the capital gains tax rate to 28% for those earning over $1 million, which is less than the 39.6% rate proposed by President Joe Biden.
Trump has not suggested changes to the current maximum 20% capital gains rate.
While some analysts, such as Brian Gardner of Stifel, caution that capital gains tax hikes have often underperformed in revenue generation, such increases could still negatively affect market sentiment, the report added.
From a broader economic perspective, a Trump presidency is seen as potentially fueling inflation and increasing the federal budget deficit, leading to more Treasury debt issuance.
Goldman Sachs has predicted that the overall economy would benefit more under a Democratic administration, due to new government spending and expanded tax credits for the middle class.
However, next year could see slower economic growth under a Trump administration due to higher tariffs and stricter immigration policies.
As portions of the 2018 Tax Cuts and Jobs Act are set to expire next year, questions about individual taxes loom large.
Trump has proposed extending those cuts, while Harris has said she would maintain them only for households earning less than $400,000 annually.
This impending tax law expiration is already a major concern for investors, according to Nicole Webb, Senior Vice President at Wealth Enhancement, the report added.