What are your thoughts on a possible US corporate tax hike and how it will impact those in Singapore who are investing in the US market?

Hi Rachelle,

A US corporate tax hike from 21% to 28% on a standalone basis would be negative for earnings and corporate profit margins. Some analysts estimate that it would shave off a mid to high single digit percentage of S&P 500 earnings if enacted.

In the event of a tax hike, some sectors will be more impacted than others, so investors might take this opportunity to rebalance their portfolio exposures accordingly. Investors can consider looking back at the biggest sector beneficiaries, during the period leading up to the approval of the tax cuts (from 35% to 21%) in end-2017. These might be the sectors most at risk of a sell off if taxes are hiked.

According to Goldman Sachs, Energy, Financials and Consumer Discretionary sectors had posted the best returns during the tax cut period, even though the reduction in effective tax rate for these sectors wasn’t the highest during that period. The discrepancy between actual tax rate reduction and stock price returns could be due to how the market views these sectors as being particularly cyclical. These sectors might be most at risk if corporate tax rates are to increase.

On a separate note, if the Biden Administration decides to impose taxes on offshore profits, this would also likely result in a disproportionately larger negative impact to tech companies.

Although the above sounds rather gloomy, we shouldn’t only consider tax hikes as a standalone event. If the tax hikes are a consequence of more aggressive fiscal stimulus measures, investors may focus more on how much these measures may bolster the economy in the shorter-term.

I had published an article in 2020 relating to a US Corporate Tax Hike that might give more clarity as well: https://theinvestquest.com/us-corporate-tax-hik...

Corporate taxes reduce profits in the short-run, but if used wisely, they can improve the labour force significantly by providing better quality healthcare, childcare, infrastructure, education and increased federal wages.

This leads to long-term benefits for the economy (and in turn, the stock market). As we can see now, the direction the US is going (despite how the stock market looks) is pretty abysmal. So an increase in taxation would be good. A caveat is that this needs to be paired with good governance, which is not America's strong suit at the moment.​​​