The Campaign Season Is Upon US
- Early polling suggests that President Trump may face a significant challenge to get reelected.
- Early polling also suggests that Democrats may take over the majority in the US Senate.
- If Democrats control the White House and Congress, legislation will be much easier to get through Congress than if the Republicans had control of even just one house of Congress.
- Democrat policies that could change expectations for corporate earnings and economic growth:
- Regulatory Policy
- Education
- Environmental
- Tax Policy
Potential Changes: The Biden Tax Policy
Potential Changes in Income taxes
- “No tax payer making under $400K will see higher income taxes”
- Tax payers earning more than $400K in a year may see income tax rate increase to 39.6%
- Top 1% of income earners may see after tax income decline by 8%
- Top 5% of income earners may see after tax income decline by 1%
Potential Changes in capital gain taxes
Tax long-term capital gains and qualified dividends at 39.6% on income above $1 million and eliminate the step-up basis
Potential changes in corporate tax rates
- Corporate tax rate may increase to 28%
- Creation of a 15% minimum corporate tax rate for companies with net incomes over $100 million
Potential changes in social security taxes
- Imposes a 12.4% Social Security tax on income earned above $400,000
- Would be evenly split between employers and employees
- Would create a “donut hole” in the current payroll tax where wages between $137,000, the current wage cap, and $400,000 are not taxed
Takeaways for Investors
- November is rather far away from a political perspective.
- Although current polling indicates that Democrats will take over the White House and both houses of US Congress, it is not a certainty.
- If Democrats do win the White House and have the majority in both houses of US Congress, it is likely that current regulatory policies will change in a meaningful way.
- Energy, Technology, Financials, and Health Care industries may be impacted the most through regulatory reform.
- Tax reform is also likely under a Biden Administration, but reform is less likely if the economy has not improved from its current state.
- High-income earners, corporations, and some investors will likely see higher tax rates if the economy is on more solid ground.
- If polling continues to indicate that Democrats will have legislative control in US Congress, markets may be negatively affected over the short term.
- Regulatory and tax policy changes are viewed as a threat to corporate earnings.
- Examples: Higher corporate taxes = lower corporate earnings = lower equity prices.
- Although these potential changes may create volatility over the short term, markets will be “re-priced” quickly to incorporate any changes in economic and earnings growth.
- Regulatory and tax policy changes are viewed as a threat to corporate earnings.
