The Biden Agenda Begins to Take Shape

Insights and Market Perspectives

Author: Greg Valliere

January 12, 2021

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IT’S DIFFICULT TO FOCUS ON JOE BIDEN’S AGENDA in the wake of the riot, as Donald Trump faces impeachment. But we’ve talked with some insiders and have initial impressions of where things are headed . . .

A SENSE OF URGENCY is a dominant theme. There’s a concern in Biden’s team that one or both of the houses could flip back to the GOP in 2022. A first-term president historically loses 5% of his congressional support in his first mid-term election. If that happens in two years, Biden could lose the House and Senate.

SO THERE’S NO TIME TO WASTE, despite all the distractions — an impeachment debate that could gobble up time, a Cabinet that hasn’t been confirmed, the need to pass a stimulus bill by early February, and most importantly a need to vaccinate millions of Americans. This latter issue already is frustrating Biden, who has snapped at his virus team for not being ready to roar out of the gate.

THE SLEEPER ISSUE: We’ll look at taxes in a minute, but it’s worth noting that an issue near the top of Biden’s agenda is climate change. Net zero emissions by 2050 is the very ambitious goal, which will require sustainable development, including investments in mass transit, charging stations for electric cars and retrofitting buildings to make them energy-efficient.

THERE’S A FUNDAMENTAL DIFFERENCE between the parties: Republicans say the Biden plan will cost jobs, while Democrats say it will create jobs. Biden’s activist environmental team believes carbon capture and sequestration technology is essential to reducing emissions from power plants as well as heavy manufacturing.

A SURE SIGN of how important this is to Biden: He will announce that the U.S. has rejoined the Paris climate control accord within hours of his inauguration next Wednesday.

REGULATORY REFORM: Biden will seek to reverse Trump regulations on dozens of issues — from antitrust policy, to drilling in Alaska, to light bulb standards. The Democrats’ control of both houses will make these reversals easier to attain.

TRADE POLICY: There’s a growing consensus in Washington — in both parties — that steep tariffs have not helped the U.S. economy. Biden probably will keep tariffs on China until there’s a new understanding between him and U.S. allies on how to confront Beijing. Relations with Canada, Western Europe and much of Asia will improve immediately; at the least, the tone will be more conciliatory.

THE BIG ISSUE — TAXES: We’re assuming that another stimulus bill, plus a more widely available vaccine, will get the economy humming by late spring. That means the Biden Administration will have flexibility to move on to the most controversial issue of all — major tax increases.

BIDEN IS VIRTUALLY CERTAIN TO PROPOSE a hike in the top individual rate from 37% now to 39.6%, and he probably will prevail on this. He wants to hike the top corporate rate from 21% to 28%, and something around 25% seems do-able. He also should prevail with a new minimum corporate tax of around 15%.

OTHER TAX GOALS WILL BE VERY CONTROVERSIAL, including any major change in estate taxes, taxing capital gains as ordinary income, imposing a new Social Security payroll tax, and enacting a Wall Street transaction tax. Moderate Democrat Joe Manchin of West Virginia won’t go along with huge tax hikes.

THE BIG IMPACT FOR THE MARKETS, of course, is how higher corporate taxes could affect earnings. A Bank of America analysis, reported recently by our friend Bob Pisani at CNBC, lists the following impacts on earnings: Technology, down 9.2%; health care, down 8.4%; communication services, down 8.2%; consumer discretionary, down 7.5%; financials, down 6.5%.

THERE WILL BE OTHER FACTORS, of course, that will affect corporate earnings, such as the positive impact on the financial services sector as higher interest rates raise their profits.

BOTTOM LINE: The Biden administration has so many goals — and such a thin congressional majority — that it will have to prioritize. What comes first after a stimulus bill? A higher minimum wage, rising to $15 per hour? A new trade plan? Immigration reform? All of these issues could get bogged down by impeachment and Covid-19.

AGAIN, THE BIG ISSUE BY SUMMER will be taxes. The financial markets apparently have shrugged off a negative impact, betting that the economy will be surging in six months. If it is, the threat of tax hikes will come sooner rather than later.