While much of the discussion about the election has been about its impact on the overall economy and equity values, the effect of any change to the U.S. corporate tax code in the post-virus economy will likely be redistributive, with some sectors gaining and other losing. To identify the sectors that will benefit the most from any tax code change under Biden, I looked at effective tax rates, capital expenditures/sales and debt ratios across all U.S. non-financial service sectors.
| variable | value_effect | proxy |
|---|---|---|
| Effective tax rate | Companies that are currently paying high effective tax rates may benefit the most from Biden. Companies that are paying low effective tax rates under existing law may pay higher taxes, if their tax deductions /credit is removed or restricted. | Effective Tax Rate |
| Reinvestment in fixed assets | Companies that invest large amounts in tangible assets (that are capitalized under existing law) could benefit from any new capital expensing provision. Companies that invest in R&D or intangible assets, which are already expensed, will likely benefit less. | Capital Expenditures as % of Sales |
| Debt Ratio | Companies that have high debt ratios will see bigger increases in costs of capital, and value decreases, as the tax benefits from debt is reduced. Companies with little or no debt will see little change in the cost of capital. | Debt/ (Debt + Equity), in market value terms |
Put simply, the sectors that deliver high effective tax rate, high capex as a percent of sales and low debt ratio will likely benefit the most under Biden in the post-virus economy.
To summarize:
Companies (sectors) that are currently paying high effective tax rates, invest large amounts in tangible (depreciable) assets and have little or no debt will likely benefit the most under Biden.
Companies (sectors) that are currently paying low effective tax rates, invest little or nothing in tangible (depreciable) assets and have high debt will likely be hurt the most in the post-virus economy.
But all the caveats apply, insofar as we are using effective tax rates and capital expenditures for \(2019\) to identify which side of the divide (higher or lower than the sector) each company fell. This should not be taken as an indication that the market will look favorably on the benefited sectors and punish the hurt sectors, since market prices have hard time to adjust to the expected tax code changes.