Part 2 – Tax Cuts? Or Increase Taxes?
What to Expect From a Trump Second Term—Taxes
With the Tax Cuts and Jobs Act of 2017 (TCJA), the Trump administration lowered the corporate tax rate, small business tax rates, and rates for individual taxpayers, which had a positive impact on consumer spending and corporate profits, and helped support markets. We generally would expect more of the same in a potential second term for Trump.
Business Taxes:
- No increases on the horizon. Given the economic climate of a post-COVID-19 lockdown world, there appear to be no real prospects that a Trump administration would consider rolling back any of the tax cuts it has implemented. The clarity that Trump’s reelection would bring to the issue of tax rates could encourage businesses to make plans for the future and allow time for them to reap the expected productivity benefits from capital investments. A second Trump administration likely would continue to promote a business-friendly, low-tax environment, allowing businesses some leeway to get back on their feet after the impacts of COVID-19. This is true for small businesses in particular—they may not be in the S&P 500, but they’re still the heart and soul of the economy.
- Action required to stop rollbacks. While most of the cuts to corporate taxes passed in the TCJA were permanent, some smaller areas of the tax cuts will phase down or expire during the next administration. Action will be needed by the sitting president to extend these areas, which include accelerated deductions for research and development costs and full expensing for short-lived business investments.
- “End our reliance on China.” Trump’s agenda includes a bid to use taxes to promote reducing the US economy’s reliance on China through a “Made in America” tax credit—credits for companies that bring jobs back to the United States—and allowing 100% expensing for certain industries like pharmaceuticals and robotics that bring manufacturing back to the United States.
- Expanding “Opportunity Zones.” Created as part of the TCJA, opportunity zones were designed to bring investment to economically distressed parts of the United States through capital gains tax relief.
Personal Taxes:
- Unspecified individual income tax cuts appear to be on the agenda, but there are no further details beyond “cut taxes to boost take-home pay” that is mentioned in Trump’s 2020 campaign agenda. Trump seems likely to address the fact that the temporary individual tax cuts, the increase to the standard deduction, and expanded child tax credit that were implemented as part of the TCJA will all expire in 2026.
What to Expect From a Biden Presidency—Taxes
The primary market risk from a Biden presidency may likely come from potential tax increases. Higher business taxes directly impact the earnings of publicly traded companies, which may flow through to stock prices. There’s also the larger question of the impact of higher taxes on the overall economy.
Business Taxes:
- The Trump administration lowered the corporate tax rate from 35% to 21%, which clearly had a positive impact on earnings and helped support markets. A Biden administration may raise the statutory rate back up to 28%, but it would likely take a Democratic sweep of Congress to enact. Even with a sweep, the move may be delayed depending on the economic environment. Even at 28%, the rate would be lower than prior to passage of the Tax Cut and Jobs Act of 2017.
- There are also lesser known tax provisions that potentially could impact businesses’ bottom lines, such as imposing a minimum corporate income tax and doubling the tax on global intangible low tax income (GILTI) from 10.5% to 21%. As above, both are unlikely to pass if the Republicans hold the Senate.
- Estimates vary on the impact to the bottom line. The tax rate alone will lift the effective tax rate a little over 5%, likely creating a similar headwind for the S&P 500. Other provisions could increase the impact on S&P 500 profits into the mid-teens or higher, although there are likely to be some offsets. Whatever the impact, some of it will likely be priced into the S&P 500 pre-election.
- There is little to argue that mitigates the impact of these tax provisions other than to note that some of the Trump administration’s goals in lowering business taxes were negated by other policies. Business investment was supposed to improve under a lower-tax regime, but trade uncertainty actually led to deteriorating business investment, even pre-COVID. Without additional business investment, the positive tax impact on long-term business and economic growth was marginal, at least in the initial few years of the cuts.
- A reduction in tariffs, which are a tax on American businesses for purchases of foreign goods, may provide a modest offset for tax increases. A Biden administration probably would be unlikely to make significant changes to tariff policy toward China, but tariffs on goods from major developed market trading partners would likely be reduced.
Personal Taxes:
- From a market perspective, the major concern is an increase in capital gains taxes, which potentially could lead to some selling before the higher rate goes into effect. Biden is unlikely to be able to pass such a provision without a Democratic sweep, and even a narrow majority in the Senate may not be enough. If sold positions are reinvested in stocks, the net effect may be negligible, and for some investors, deferring taxes, even at a higher future rate, may be more desirable than recognizing gains immediately.
Our Focus
Remember our focus is strictly on the market impact of the election, with the economy also a secondary concern, since that feeds into market impact. Our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets.
These previews have been grounded in the facts, focusing on the upside and potential concerns of each candidate’s administration. If the upside doesn’t seem realistic, it can be dismissed, but we still think it’s useful to get a plausible version of the potential market upside (or lack of downside if that’s the best case) on the table.
I’ve also written many times about our nation’s debt, the added stimulus from 2020 (creating more debt), and how we seem to be ultimately pushing this problem on to our kids and grandchildren. This is still a major concern. Our fiscal path is not sustainable in the long-term. The next president needs to address this issue before we have a greater financial train wreck. Each passing day continues to add to the nation’s debt and the unfair burden we’re placing on the next generation and beyond. Neither candidate has revealed a clear path to resolve this.
As I mentioned last week, I am not a political expert, but am very concerned about the election. I believe the best thing we can do is educate ourselves. I encourage you not to dismiss another’s perspective, but to embrace it…then research it…and come to your own conclusion. I’m continually praying for our nation to be united rather than divided. We must stand up for what we believe in AND love our neighbor. Sometimes it seems hard to do both, but surely there is a way.
Next week we’ll review what to expect from each candidate on regulation, or, lack thereof.
