Corporate taxes are a commonly covered topic in financial publications Fisher Investments UK reviews. We often see analysts discuss their purported benefits and negatives, though we don’t take a stance on any tax change’s merits or drawbacks. Rather, our analysis focusses on the economic and market impact only. Based on our research, corporate tax changes don’t have a set impact on market returns – useful perspective for investors to internalise, in our view.
According to Fisher Investments UK’s reviews of market analyses, it is common to view higher taxes as negative for companies – since they may erode profits – and thus bad for equities. The argument goes as follows: raising taxes means less capital available for growth-orientated endeavours (e.g., investment in technology or hiring). It also presumes companies may cut employee pay and/or raise prices to compensate, reducing consumer spending. The flipside of this argument is that lowering taxes is good for companies, so it must be good for equities.
We understand this argument’s appeal and generally think it is beneficial for private companies and individuals to have more cash to deploy in productive ways. However, Fisher Investments UK’s reviews of historical market data show corporate tax changes – whether a hike or a cut – don’t have a set relationship with equity returns. Consider the following examples (with market returns in each nation’s home currency to avoid possible skew from currency swings).i
In the UK, the main corporate tax rate has trended downward over the past two decades, from 33% in 1996 to 19% in 2022. But in the 12 months after a lower rate went into effect, UK market returns varied. Double-digit positive stretches included the 12 months starting 1 April 1997 (38.1%), 1999 (11.4%) and 2012 (16.6%).ii But there was also a big negative year in 2008 (-29.1%) after the rate dropped from 30% to 28%.iii From 2011 – 2015, the UK government lowered rates each year starting 1 April – yet that didn’t automatically buoy UK returns. UK markets had one double-digit positive period (2012’s 16.6%), three single-digit stretches (2011’s 1.7%, 2013’s 8.4% and 2014’s 5.9%) and one negative spell (2015’s -4.4%).iv
Fisher Investments UK’s reviews of other developed-nation markets shows this mixed relationship between equities and corporate tax changes holds, too. For example, France raised its main corporate tax rate in 2013, from 36.1% to 38%, yet French equities rose 22.2% in the 12 months following the change.v The German government cut its corporate tax rate from 38.9% to 30.2% in 2008, but that didn’t prevent German equities from plunging -43.1%.vi Another way to see the inconclusive effect of corporate tax changes: in the US, which we highlight here due to the S&P 500 index’s long historical dataset, equities averaged 7.4% in the 12 months after a corporate tax hike and 4.5% following a tax cut since 1946.vii In our view, that shows you tax changes don’t have any reliable impact on future market returns.
The reason? Based on Fisher Investments UK’s reviews of market drivers, taxes are just one factor equities consider. Yes, they are a cost, but based on our research, a tax cut doesn’t make a business instantly more profitable nor does a tax hike automatically send profits lower. The causes underlying corporate profitability are myriad, including revenues, interest costs, depreciation, capital investments and operations – taxes are just one variable in this equation. Companies can also find exemptions, so we think headline corporate tax rates are largely meaningless when there are so many deductions and workarounds. Moreover, considering corporate tax rates are well known, we think equity prices likely reflect the impact of those laws, as equities are efficient discounters of widely known information. For instance, as we write, the UK’s corporate tax rate is scheduled to rise from 19% to 25% next April, yet the legislation putting this tax rise in place was introduced in March 2021 and passed several months later in June. In Fisher Investments UK’s view, understanding corporate taxes’ limited equity market impact can benefit investors, especially when headlines speculate about the potential effect on market returns.
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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
i Source for corporate tax rates unless specified otherwise: Tax Foundation, as of 12/10/2022. “Corporate Tax Rates Around the World, 2021,” Sean Bray, Tax Foundation, 9/12/2021.
ii Source: FactSet, as of 17/10/2022. MSCI United Kingdom Investable Market Index returns with net dividends, in GBP, 31/3/1997 – 31/3/1998, 31/3/1999 – 31/3/2000 and 31/3/2012 – 31/3/2013.
iii Ibid. MSCI United Kingdom Investable Market Index returns with net dividends, in GBP, 31/3/2008 – 31/3/2009.
iv MSCI United Kingdom Investable Market Index returns with net dividends, in GBP, 31/3/2011 – 31/3/2012, 31/3/2012 – 31/3/2013, 31/3/2013 – 31/3/2014, 31/3/2014 – 31/3/2015 and 31/3/2015 – 31/3/2016.
v Ibid. MSCI France Investable Market Index returns with net dividends, in euro, 31/12/2012 – 31/12/2013. Currency fluctuations between the euro and pound may result in higher or lower investment returns.
vi Ibid. MSCI Germany Investable Market Index returns with net dividends, in euro, 31/12/2007 – 31/12/2008. Currency fluctuations between the euro and pound may result in higher or lower investment returns.
vii Source: Tax Policy Center and Global Financial Data, Inc., as of 17/9/2020. Tax policy changes and S&P 500 price returns, in USD, from 31/12/1945 – 31/12/2018. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.