Corporate Tax Increase Could Impact Small Caps

Felipe Mejia

Felipe Mejia

Analyst

The Biden administration’s tax proposal seeks to increase the corporate tax rate from 21% to 28%, repealing about half of the decrease from the 2017 Tax Cuts and Jobs Act. Consensus believes that the hikes will be meaningfully smaller (around 25%) than those proposed, due to Democrats’ slim majority in Congress and moderate Democrats who do not want excessive tax increases. As a result, the increase in tax revenue likely will not be enough to pay for the costly infrastructure plan plus the other stimulus that is expected to come; thus, the deficit will likely increase even further. This brings some investors to worry that increasing the deficit after the extreme spending measures brought upon by the pandemic can likely lead to greater inflation.

Fiscal stimulus and easy monetary policy already have us in the easiest financial conditions on record; increasing the deficit further possibly could cause the Federal Reserve to act sooner than expected to slow down the economy from overheating, leading to a shortened growth cycle. This could then lead to increased steepening of the yield curve and market leadership repositioning. When the tax cuts took effect during the previous administration, the greatest beneficiaries in the United States were small-cap stocks. Because of this, we suspect that small caps likely will take the biggest hit if the corporate tax rate does increase, but it’s only one factor to consider when making investment decisions.

Voya Investment Management has prepared this commentary for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future returns.

The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Strategy holdings are fluid and are subject to daily change based on market conditions and other factors.