by Greg Valliere, AGF Management Ltd.
A PUZZLE: Why are banks and brokerage houses contributing far more to Joe Biden than Donald Trump — despite the likelihood of significantly higher taxes if Biden wins?
BIDEN HAS RAISED FIVE TIMES MORE MONEY than Trump from Wall Street, as the President faces a surprising cash shortfall heading into the final two weeks of the campaign. Why the lack of enthusiasm for him from the financial sector?
SOME ANALYSTS SAY it’s simply a matter of backing a winner, others say a Biden presidency would be more stable and predictable, with a moderate trade policy and a huge stimulus in early 2021. But that seemingly overlooks the looming tax hikes.
WE’VE SEEN ALL THE THINK TANK analyses (the non-partisan Tax Foundation web site is our favorite), and we have to conclude that a significant economic slowdown is possible in 2022, after the Biden tax hikes win enactment.
WE BASE THAT PREDICTION on the likelihood that Biden will first move to stimulate the economy with a $2 trillion-plus bill in early 2021 (assuming that he wins in a Blue Wave that returns the Senate to the Democrats, and assuming that the Pelosi-Mnuchin talks fail to produce a stimulus bill that could win any Republican support).
BIDEN MAY NOT MOVE ON TAX HIKES IMMEDIATELY if the economy still looks fragile. Besides, he may not want to antagonize the markets right away in 2021. But after the stimulus passes, a tax hike package will begin to move in committees by next summer. It’s too early to predict the effective date, but the big economic impact would come in 2022, after the stimulus sugar high has receded.
NO ONE CAN BE CERTAIN of the economic impact of the Biden tax hikes, but most think tanks estimate a tax hike would raise around $2.5 trillion in a ten year window. The Biden plan is largely a mix of tax hikes and tax credits.
THE BIGGEST IMPACT ON CORPORATE EARNINGS obviously would be Biden’s proposed hike in business taxes from 21% now to 28%. Corporations also would face a 15% minimum tax — and there would be several other business tax hikes, including a doubling of taxes on income of foreign subsidiaries of U.S. firms.
INDIVIIDUAL TAXES WOULD RISE SIGNIFICANTLY for those with income of over $400,000 but even people earning less would be subjected to higher prices passed along by businesses that are hit by higher taxes.
FOR WEALTHY AMERICANS, ESTATE TAXES WOULD RISE, Social Security taxes would increase, itemized deductions would be capped, and capital gains would be taxed as ordinary income — a huge factor that could lead to cashing in gains before the effective date.
OFFSETTING SOME OF THESE HIKES, Biden would have more generous tax credits for everything from child care to new homebuyers to use of renewable energy. And with monetary policy still exceptionally accommodative, the economy might withstand the impact of higher taxes in 2022.
BUT TIMING IS EVERYTHING: As the impact of the next stimulus bill begins to wear off, the debate will shift to hiking taxes. Wall Street may be initially comfortable with Biden in 2021 if there’s a stimulus sugar high, but 2022 could be different, as at least a dozen higher taxes take effect. So for Wall Street, we say: Be careful what you wish for.
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LAST NIGHT’S TOWN HALLS: Biden made no major gaffes, so he won. Trump lost the fact-checker battle, as usual. Trump needs to close the gap by at least three or four points in the coming week; maybe the Oct. 22 debate will help him, but there aren’t many undecided voters left.
BIDEN IS CONTENT to simply run out the clock, which can be dangerous in sports — but with a 10-point lead, his camp just wants to avoid mistakes.
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This post was first published at the AGF Perspectives Blog.
