Boston - For all the focus on the reopening of the global economy and the potential for higher inflation, one risk that may not be getting enough attention from investors is higher taxes.
The Tax Cuts and Jobs Act of 2017 reduced the federal effective tax rate on corporate earnings from 35% to 21%, putting the U.S. more in line with other developed countries. S&P 500 earnings jumped 22.5% in 2018, the first year with the lower tax rate.
As Congress takes up President Biden's tax plan for possible passage later this year, we see the potential for a partial reversal of the cut in the corporate tax rate, with a rate of 28% proposed. In addition to the statutory rate, raising the minimum tax on foreign-sourced earnings from 13% to 21% is also on the table. This would likely have a disproportionate impact on U.S.-domiciled multinationals with high levels of intellectual property — for example, Big Tech and Big Pharma.
Along with a tax hike's hit to corporate earnings, certain shareholders would have to contend with the possibility of higher capital gains tax rates. These tax increases are likely to be focused on higher income earners, whose capital gains rates could rise to 28% or even 40%.
Bottom line: If those tax rate hikes are implemented with an immediate effective date, we think investors could be well served to consider tax planning moves in the first half of 2021.
S&P 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance.
Eaton Vance Investment Tax Center
Stay on top of 2021's major tax and investment implications for your clients with our tax-forward insights and needs-based solutions.
Eaton Vance Parametric Investment Tax Calculator
Taxes always matter. See your clients' combined total tax rate, including federal, state and local taxes, right now and hypothetically under the Biden Tax Plan.