Will Kamala Harris’ Plan to Raise the Corporate Tax Rate to 33% Send Stocks Down? The history could not be clearer.

In just over five weeks, voters will head to the polls or cast ballots to determine which path our great country will take for the next four years.

While there are aspects of tax governance that have nothing to do with Wall Street, some of the laws crafted on Capitol Hill by elected officials have an impact on American corporations 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 reduced the corporate tax rate from 35 percent to an all-time low of 21 percent, current Vice President and Democratic presidential nominee Kamala Harris has proposed raising the rate corporate tax by a third to 28% to generate additional revenue.

The million dollar question is: Will raising the corporate tax rate to 33% drive stocks lower? For this answer, I’ll let history speak.

Kamala Harris proposes to raise corporate tax rate by 33% – should investors be worried?

Before diving into what history has to say about past corporate tax hikes and the stock response, it’s important to understand the “why” that compels Harris to propose raising corporate taxes.

With the exception of 1998 to 2001, the US federal government has spent more than it has generated in revenue every year since 1970. These nominal dollar deficits have grown over the past two decades in the wake of the dot-com bubble, the financial crisis and the COVID-19 pandemic. In 2023, the federal deficit approached $1.7 trillion, raising the US national debt to about $35 trillion.

The cost of servicing and maintaining our national debt is rising at an alarming rate and is simply not sustainable in the long term, requiring proposals from elected officials, including presidential candidate Harris, to raise revenue and/or reduce spending .

Harris’ plan to raise the corporate tax rate to 28 percent would play a vital role in increasing federal tax revenue by about $4.1 trillion from 2025 to 2034, according to an analysis by the Tax Foundation, a Washington think tank. DC. Note that this estimate includes Harris’ entire tax proposal and is not based solely on the corporate tax increase.

The rise in the corporate tax rate, on paper, would appear to be bad news for business. A higher tax rate would be expected to leave less revenue for employment, procurement and innovation. But what makes sense on paper doesn’t always translate into the real world.

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A study by Fidelity looked at the impact of three separate types of tax increases — personal, corporate and capital gains — over roughly seven decades, beginning in 1950. In all, Fidelity analysts examined 13 years separately, where at least one of these types of taxes increased and took into account the performance of the benchmark S&P 500 (SNPINDEX: ^GSPC) in the previous calendar year, during and after the fiscal change in question.

There have been five times since 1950 that the corporate tax rate was raised: 1950, 1951, 1952, 1968 and 1993. The annual price return for the S&P 500 during these years on Fidelity was 22%, 16%, 12 % , 8% and 7% respectively. On average, the S&P 500 has win 13% when the corporate tax rate increases.

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

There is a larger concern for the stock, and it has nothing to do with Harris or Trump

While investors shouldn’t worry too much about the prospect of a corporate tax hike if Kamala Harris wins in November, that doesn’t mean the stock market has a clean bill of health.

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), the euphoria of stock splits and corporate earnings, overall, beating the tempered expectations of Wall Street, we have witnessed the iconic Dow Jones Industrial Average (DJINDICES: ^DJI)it broadly trailed the S&P 500, and the rally was fueled by stocks Nasdaq Composite (NASDAQINDEX: ^IXIC)climb to multiple record highs in 2024. But the broadest of these three indexes, the S&P 500, is making noise for all the wrong reasons.

Despite the fact that “value” is in the eye of the beholder, the S&P 500’s Shiller price-to-earnings (P/E) ratio, which is also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), has a remarkable effect. Good job detailing how high ratings are right now compared to the previous 150+ years.

The P/E ratio is probably the most well-known investment metric. It divides a company’s share price by its trailing 12-month earnings per share (EPS) (TTM) to get a figure that can be compared to its peers, the broader market and history to determine whether a company is relatively cheap. or expensive

Meanwhile, the Shiller P/E ratio is based on average inflation-adjusted EPS over the past 10 years. The advantage of looking at 10 years of inflation-adjusted EPS data, as opposed to TTM EPS, is that it mitigates shock events (eg, the COVID-19 pandemic) that can easily throw off shorter-term valuation measures such as be the traditional P/E. report.

When the closing bell rang on September 26, the S&P 500 Shiller P/E was at 36.9. This more or less matches the high for the current bull market rally and is more than double the average reading of 17.16 when tested back to January 1871.

What’s more worrisome is how stocks have reacted following the five previous occasions when the S&P 500’s Shiller profit margin has exceeded 30 during a bull market. While there is no rhyme or reason to how long valuations can remain extended, the S&P 500, Dow Jones Industrial Average, and/or Nasdaq Composite all have in the end (keyword!) lost between 20% and 89% of their value following these occurrences.

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

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

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Will Kamala Harris’ Plan to Raise the Corporate Tax Rate to 33% Send Stocks Down? The history could not be clearer. was originally published by The Motley Fool