All other things being equal, a higher corporate tax rate represents a headwind to corporate earnings.
Corporate tax reform is a hot topic these days as the presidential nominees make their pitches ahead of the U.S. presidential election.
In a research note published last Wednesday, Goldman Sachs’ Ben Snider considered what changes to the corporate tax rate could mean:
We estimate that each 1 percentage point change in the statutory domestic tax rate would shift S&P 500 EPS by slightly less than 1%, or approximately $2 of 2025 S&P 500 EPS, all else equal. This sensitivity does not take into account other potential changes to the tax code such as the treatment of non-US income or the alternative minimum tax rate…
The proposed corporate tax changes could directly shift S&P 500 earnings by 5-10%. A tax cut scenario in which the federal statutory domestic corporate tax rate declines from 21% to 15% would arithmetically boost S&P 500 earnings by about 4%. A tax hike scenario in which the rate rises to 28% would reduce earnings by about 5%. Combined with additional proposed changes to the taxation of foreign income and an increase in the alternative minimum tax rate from 15% to 21%, this scenario could reduce S&P 500 EPS by about 8%. Note that these sensitivities only reflect the direct impact of changing tax policy and do not take into account secondary impacts such as through changes in economic activity.
There’s nothing too surprising in Snider’s analysis.
However, his writeup included a critical phrase you might’ve missed: “all else equal.”
