‘All Companies Are JVs’: Biden Tax Policy Replaces COVID As Top Concern For Some Goldman Clients

Joe Biden may have promised that “nothing will fundamentally change” if he’s elected, but the Trump tax cuts will be revisited after November in the event of Democratic gains.

This isn’t just a political issue anymore. Just ask Gary Cohn, the architect of Trump’s tax overhaul.

“[Congress] needs to look at our budget — how we spend money — and in addition to that, I think they need to look at our tax system and they have to think of ways we raise revenue”, Cohn told Fareed Zakaria late last month. “You know, if you think back to 1935 and the Depression, some major tax reform came out of that”.

Read more: Gary Cohn – Congress Needs To Be Ready To Spend $3-5 Trillion ‘At Any Given Moment’ In Crises

Prior to the COVID panic, one of the biggest concerns for investors was the potential for changes to tax policy. Once Biden locked up the Democratic nomination, some of the angst abated (i.e., “Bernie risk” went away), but nevertheless, it’s still a risk for equity prices.

About a month ago, while discussing indeterminacy around 2021 earnings, I conjured a series of hypotheticals, using Goldman’s projections, consensus forecasts and the bank’s previous outlook for S&P 500 EPS in the event the tax cuts are rolled back. I’ve updated the visual to account for the S&P’s gains since then, and also for a slight revision to consensus bottom-up forecasts for 2021.

Think of Goldman’s downside (as it stood on May 15) as incorporating myriad wild cards around the virus. If you subtract the bank’s projected earnings hit from a hypothetical rollback of the Trump tax cuts from that downside scenario for 2021 EPS (i.e., in order to generate a kind of “absolute worst-case“), you end up with a forward multiple of more than 33.

In a new note, the bank’s David Kostin talks a bit more about this.

“The [S&P] stands just 8% below its February peak. With markets looking ahead to the post-pandemic recovery, investor conversations have increasingly focused on the political landscape”, he writes, noting that prediction markets “now show roughly 50% likelihoods of Democrats winning the presidency and the Senate in November”.

Not surprisingly, Goldman’s clients “see the most important equity market implication” of a prospective Democratic victory as “the potential for higher corporate tax rates”.

Kostin writes that “in some ways, tax policy represents a larger risk to earnings and consequently to equity prices” than the pandemic.

Of course, that depends on how you think about the virus (e.g., its likely evolution, the potential for durable changes in consumer behavior, etc.), but Goldman notes that thanks to policy support (both fiscal and monetary), “investors have largely looked through the coronavirus as a temporary hit to total corporate earnings”.

A change in corporate tax policy, on the other hand, “would reduce expectations for the entire long-term stream of profits”, Kostin says, in the course of reminding you that “every company in the world is in a joint venture” with the government as a partner “and its stake represented by the effective corporate tax rate”.


You can think of the Trump tax cuts as lifting S&P 500 companies’ stake in this joint venture by 10% (to more than 80% from 70%).

“From a valuation perspective, the NPV of the incremental future earnings reallocated by the reduced tax rate suddenly inured to the shareholders whereas it previously benefitted the government”, Kostin goes on to say, elaborating on the point. “That is what happens when the JV split goes from 70/30 to 80/20, but the split may change in 2021 depending on the outcome of the November election”.

To be sure, this matters – a lot. Over the past three decades, half of the increase in corporate profit margins and a quarter of total S&P 500 earnings growth is attributable to falling effective tax rates.

Goldman quickly recaps Biden’s tax proposal as follows:

Presumptive Democratic nominee and former Vice President Joe Biden has proposed partially reversing the 2017 TCJA. According to the Tax Foundation the former Vice President’s plan would raise the statutory federal tax rate on domestic income from 21% to 28%, reversing half of the cut from 35% to 21% instituted by the TCJA. In addition, the plan would double the GILTI tax rate on certain foreign income, impose a minimum tax rate of 15%, and add an additional payroll tax on high earners. These changes would be complemented by a variety of changes to the personal tax code, including an increase in the tax rate applied to capital gains and dividends for the highest income individuals, as well as potential changes in non-tax regulatory policy that could also affect corporate earnings and equity valuations.

If implemented, this would shave $20 from the bank’s 2021 EPS estimate for corporate America.

Goldman writes that although Biden’s plan would only negate around half of the Trump tax cuts in terms of the statutory rate, when you consider it with “other proposals”, it would push the effective rate for S&P 500 companies to 26%. Throw in a presumed “drag on US GDP of a similar magnitude” and you end up with a 12% hit to next year’s earnings.

Of course, you could argue that it’s not the end of the world if corporate America has to pay higher taxes, but shareholders aren’t enamored with the idea, especially at a time when the outlook for corporate profits is still clouded by uncertainty around COVID-19.

Goldman’s Kostin writes that “investors not only face uncertainty regarding the specifics of potential tax reform, but also five more months of market volatility before the resolution of a close political race that could eliminate the likelihood of tax reform altogether”.

I’m not entirely sure that latter bit is accurate. As Cohn emphasized last month, Congress will need to at least consider whether somebody, somewhere, needs to pay higher taxes considering the spending attached to trillions in virus relief.

It’s probably fair to say that most Americans have by now come around to the reality that the Trump tax cuts disproportionately benefited corporations and the wealthy, which means any effort to collect more revenue cannot possibly come in the form of higher taxes for lower- and middle-income earners, especially not at a time when unemployment is high and the economy is still trying to recover from the biggest shock in a century.

Trump has repeatedly promised to do something specifically for the middle-class in terms of tax relief. That promise remains unfulfilled.


Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

15 thoughts on “‘All Companies Are JVs’: Biden Tax Policy Replaces COVID As Top Concern For Some Goldman Clients

  1. Would be great to use those revenues toward R&D and investments in AI, biotechnology, the electrical grid, and investmentes back into our country. I’ll tell you, after all the looting (by elites, not recent protestors) the last 40 years, the place is looking run down. An industrical policy for once would in thte last 40 years would probably be a really good thing right about now.

    We’re lucky to get back to 1.2% real growth any time….well, any time again ever now it seems. Demographics are kind of ok but not, but need to get productivity up. Innovation is one thing we do well in this country. Need and in strategic areas.

    Of course the spoils would be fought over and the oligarchs would stand the chance of the lions share given the current playing field. Going to be an interesting next few years.

  2. “To be sure, this matters — a lot. Over the past three decades, half of the increase in corporate profit margins and a quarter of total S&P 500 earnings growth is attributable to falling effective tax rates.” I could come down on the side of maintaining the cuts if something positive had happened but employee real incomes were flat, research and innovation were nothing to write home about, GDP growth was lackluster for the most part. So where did the money go? Buybacks of course. Big whoop. If the greedy companies can’t figure out how to make their egregious windfall accomplish more than it did then taking half of it back is not unreasonable. Moreover, I’m retired and my damn taxes went up.

    How about this? Devise a plan whereby firms can earn their tax cut. Set up a sliding scale so that the more money employees make, the less taxes companies pay. After all, higher salaries mean more individual taxes paid. And the more the companies pay their employees the lower their taxes are. Let’s get smart here. I’m tired of hearing about non-existent “trickle down.” Instead of letting the big guys spend all their dough on buybacks, let’s ensure that trickle down and watch GDP grow for a change.

  3. This is a great post H….because it lays out the rationale for what was effectively a large part of the upward trajectory of equity prices over the last 4 years.. It also showcases where market performance has become the end all in Economic decisions as well as the basis for sentiment..
    I can’t help but feel a veiled threat however , that if Bozo is not the next president everyone’s 401 K’s will retreat to traditional levels . You could ask (which Bozo ? )

  4. Chance of corporate welfare subsidies being eliminated by either party is oh how about less then zero.

    Too important to the DC parasites campaign fund raising.

  5. This note by GS is exactly why it’s so hard to defend American-style capitalism. The tax cuts flew in the face of any notion of fairness or economic stewardship. When shareholders advocate for policies that harm the broad swath of America that aren’t shareholders, the oligarch class needs to cut it out with the disingenuous hand-wringing and expect–rather than fear–the next Bernie Sanders or Elizabeth Warren. They are creating the need for them!

    I say this as a shareholder and someone who was unlikely to vote for either candidate. When capitalism causes more problems than it solves, it will be changed or abolished. That shouldn’t be a surprise to GS or any other market participant.

  6. Another reason to own recovering cyclicals instead of priced-for-perfection defensives/tech. Many of them will have such large NOLs from 2020, that they will be able to shield 80% of pretax income for years.

    1. I need to be more complete. CARES allows companies to carry back this year’s losses over the past 5 years. So many cyclicals with big losses in 2020 might choose to get refunds of prior years’ taxes instead of offset future years’ taxes. I don’t know if they can tap those refunds in 2020 or have to wait until 2021. So far I haven’t run across any mention of this in the companies I’ve looked at.

  7. A good manager will reduce the impact of taxes on the business. Therefore the dire predictions of Goldman are erroneously playing into the hands of Mitch and Donnie.

  8. Just increase capital gains tax to normal income level and simplify dividend taxes to achieve same. Reduce size of tax code without making it less progressive.

  9. Excellent article. William Goldman:follow the money. 80%of Americans own what % of America’a equity market? Why should they care if the stock market sells off? We’ve had forty years of our wealth migrating upward. Politicians are short term in thier approach, like most of Wall Street. We have the example of private equity, which makes me think of Meyer Lansky. You can buy real estate here without giving up your true identity. I worked on Wall Street a long time, and I think we have the America that the top echelon wants…

NEWSROOM crewneck & prints