New York CNN Business  — 

President Joe Biden got almost everything he wanted with his $1.9 trillion economic rescue plan. Goldman Sachs thinks Biden will face far more resistance in his quest to unwind former President Donald Trump’s tax cuts.

Biden campaigned on hiking the corporate rate from 21% to 28%, raising the tax on foreign income and instituting a minimum corporate tax rate.

Such moves would deal a significant blow to corporate profits, wiping out an estimated 9% of next year’s S&P 500 per-share earnings, according to a client report published by Goldman Sachs.

However, Goldman Sachs is betting Biden’s tax plan ambitions will get watered down by political reality. Republicans are expected to oppose the tax hikes en masse and moderate Democrats may be wary, too. Goldman Sachs is penciling in a smaller hike that lifts the corporate tax rate to 25%. That more modest tax hike would create only a 3% drag on earnings, the investment bank said.

The comments show how the attention on Wall Street is shifting from Biden’s $1.9 trillion American Rescue Plan and the reopening of the US economy to how Washington will pay for a massive infrastructure package.

“Equity investors will soon pivot focus from rising interest rates to rising tax rates,” Goldman Sachs strategists wrote in the note.

Chamber of Commerce: Tax hikes will ‘hobble’ the recovery

Prominent business groups are warning against the effort to roll back the 2017 Trump tax cuts, which lowered the corporate rate from 35%.

The Business Roundtable said it will be “actively opposing” attempts to raise taxes on corporations.

“Coming out of the pandemic, raising taxes – especially to the degree the Biden administration is proposing – would hobble any economic recovery,” Neil Bradley, the US Chamber of Commerce’s executive vice president and chief policy officer, told CNN Business on Friday.

Bradley applauded Biden’s focus on infrastructure as “right on target,” but predicted pairing that with tax hikes will ultimately backfire.

“If you add [tax hikes] to an infrastructure bill,” he said, “all you’ve done is defeat the infrastructure bill.”

Larry Summers: This is the ‘least responsible’ fiscal policy in 40 years

Wall Street, however, is hardly freaking out about the potential of unwinding the Trump tax cuts, which sent US stocks surging in 2017 and 2018.

“Equities appear to be pricing optimism around infrastructure spending but little concern about tax hikes,” Goldman Sachs strategists wrote.

Rick Rieder, BlackRock’s chief investment officer of global fixed income, told CNN Business last week that the US economy can “definitely” withstand higher corporate taxes. “I think 21% is too low,” Rieder said.

Goldman Sachs expects Biden’s next fiscal plan will include at least $2 trillion in infrastructure spending and could reach $4 trillion if it also funds healthcare, education and other initiatives.

Given surging US debt, Biden will be under pressure to pay for some of this ambitious spending by raising revenue.

Over the weekend, Larry Summers, who advised the prior two Democratic administrations, warned that the United States is suffering from the “least responsible” fiscal policy in 40 years.

Raising taxes on the wealthy

To raise revenue, Biden has proposed hiking taxes on the wealthy. Those earning more than $400,0000 “will see a small to significant tax increase,” Biden told ABC News last week.

Under Biden’s campaign proposal, those earning more than $1 million a year would have to pay higher taxes on capital gains. Capital gains would be subject to the top marginal rate for wages and salaries – currently 37%, but rising to 39.6% under the Biden proposal.

Goldman Sachs expects Biden will be able to raise the capital gains tax rate for the highest earners, but not as high as he proposed.

The risk is that such a tax hike could rattle the stock market, forcing some investors to sell before the tax hits.

In the past, such tax hikes have corresponded with lower stock prices, momentum reversals and less investing in the stock market, Goldman Sachs said.

“However, all of those patterns were short-lived and reversed following the hikes. We expect that any selling triggered by capital gains hikes late in 2021 would be similarly short-lived,” Goldman Sachs wrote.