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U.S. investors weigh proposed tax increases (part 2)

Wells Fargo Investment Institute - May 5, 2021

by Chris Haverland, CFA, Global Equity Strategist; Ken Johnson, CFA, Investment Strategy Analyst

Key takeaways

  • The Biden administration has proposed significant new federal tax increases for corporations and individuals. In part 1, released on May 4, 2021, we considered the possible impact of the intended tax hikes on individuals. Part 2 considers the corporate federal tax proposals.
  • We anticipate federal corporate tax rates will rise, but fall short of Biden’s 28% proposal. Our expectation is that the administration’s corporate tax proposal could shave approximately 5% from 2022 S&P 500 Index earnings.
  • Multinational companies likely will be hit the hardest. However, a record level of economic growth and fiscal spending should support higher corporate profits, potentially offsetting the drag from a higher federal tax regime.

What it may mean for investors

  • Despite potential changes in tax policy, we maintain a favorable view on Communication Services, Consumer Discretionary, Financials, Industrials, Information Technology, and Materials.

The Biden administration has proposed raising U.S. federal corporate tax rates to fund a multi-trillion dollar infrastructure package. If passed, the proposal would partially reverse the Trump-era tax cuts and be the first major corporate tax increase since the 1960s. In addition to the statutory tax rate going from 21% to 28%, there are proposed increases related to foreign income and a minimum tax on book income. While negotiations are likely to go through the summer, many investors are wondering what impact the potential changes to corporate tax policies could have on company profitability and the equity markets.

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