With less than two months until the presidential election, the policy platforms for President Donald Trump and Vice President Kamala Harris are gradually forming. Through speeches and debates, each candidate is laying out what they stand for and how they would change existing policies. For investors, perhaps the most scrutinized area is taxes, and there are questions about how changes to tax rates could impact both Wall Street and Main Street. What should investors know as we approach November 5th?
It’s Important to Maintain Perspective this Election Season
While taxes have a direct impact on households and companies, they do not always have a straightforward effect on the overall economy and stock market. This is because taxes are only one of the factors that influence growth and returns. There are many deductions, credits, and strategies that can reduce the statutory tax rate, while spending and investment patterns often adjust to work around taxes. In other words, lower taxes do not automatically result in an economic boom and higher tax rates do not necessarily result in a crash.
In addition, election rhetoric and actual policies can be quite different. Candidates often make promises based on their political leanings that may not fully materialize once in office. Even after a candidate is elected, Congressional partnership and approval is still required to pass new tax laws. Historically, the president’s party tends to lose seats in Congress in their second term, and their approval rating tends to decline. This process can alter or water down initial proposals.
For example, during the 2016 presidential campaign, President Trump promised a complete overhaul of the tax system. While the Tax Cuts and Jobs Act was a significant change to the tax code, it also retained many existing elements. Similarly, President Biden criticized the TCJA during the 2020 election cycle and discussed raising taxes on high income earners and corporations. While the Inflation Reduction Act of 2022 did impose a 15% minimum corporate tax rate, this is far from the sweeping changes discussed during the election.
Tax policy is an extremely complex subject, so when it comes to taxes it’s always important to work with a trusted advisor. In addition, both candidates’ platforms are still subject to change despite the short timeline until election day. While it’s impossible to cover all the details here, many key differences on taxes come down to the future of the Tax Cuts and Jobs Act (TCJA).
The Future of The Tax Cuts and Jobs Act and The National Debt is Uncertain
The truth is that statutory tax rates have been quite low by historical standards for decades. Even if there are no changes in the next presidential term, with the federal debt continuing to expand, many economists worry that taxes will have to rise to close the gap in the future.
The TCJA took effect in 2018 and included a reduction in individual income tax rates, including a drop in the highest individual rate from 39.6% to 37% and a near doubling of the standard deduction. In addition, the corporate tax rate went from 35% to 21%, while the US implemented a territorial tax system for corporations. The TCJA also lowered estate taxes, eliminated personal exemptions, and adjusted several other deductions and credits.
As discussed above, the Inflation Reduction Act of 2022 introduced a 15% minimum tax on large corporations with annual profits over $1 billion. It also imposed a 1% excise tax on stock buybacks for publicly traded companies.
Unless action is taken by the president and Congress, many provisions of the TCJA will expire as of the 2026 tax season, creating a so-called “tax cliff.” This makes taxes especially contentious this election season. Here are some of the items the candidates are discussing:
- Trump proposes cutting corporate taxes further from 21% to 15% for some companies, including manufacturers who make their products domestically. Harris is in favor of increasing the corporate tax rate to 28%, in line with President Biden’s position.
- Trump has discussed extending the TCJA’s individual tax rates, but specifics are still unclear. Harris supports allowing the top marginal rate to revert to 39.6%.
- Harris proposes raising the capital gains rate from 20% to 28%. Along with an increase in the “net investment income tax” introduced with the Affordable Care Act, the top capital gains rate would rise to 33%, the highest since 1978.
- Both candidates propose new enhanced child tax credits and not taxing tips. Trump has discussed eliminating taxes on Social Security for seniors.
- Harris proposes expanding the startup expense deduction from $5,000 to $50,000 and $25,000 in support of first-time homebuyers making down payments.
- Harris proposes a new tax on unrealized capital gains for those worth $100 million or more. Such a tax would be historic. The recent Moore v. United States case in the Supreme Court loosely touched on this by allowing a provision in the TCJA that imposed a one-time tax on unrepatriated foreign earnings.
The Economy Has Grown Under Both Parties
Unfortunately, the annual budget deficit remains high and the national debt is likely to grow, regardless of who occupies the White House. While studies on the matter differ and should be taken with a grain of salt, many suggest that either candidate would add trillions to the debt in the coming years.
On the other hand, it’s also the case that the economy has grown over time under both political parties. As mentioned earlier, the individual occupying the White House may not be the most important factor for the economy and markets, regardless of how counterintuitive that may seem. Policy changes tend to be gradual, and cumulative. Sometimes changes that are good – or bad – for the economy take years to play out and span administrations.
So, while taxes do play an important role in financial plans, they may not impact investment portfolios and economic growth in the clear and direct way some might imagine. On the other hand, there are choices that individual savers and investors can make in order to manage their own financial well-being over the long term. Should taxes go up, individuals can typically make choices that enable them to stay the course of their chosen wealth strategy – despite short-term tradeoffs. In the face of such choices, of course, it’s important to work with a trusted advisor, understand all the available options, and focus on one’s long-term goals. By maintaining a balanced perspective and focusing on the long-term, investors can better position themselves for success across the evolving political landscape.
As always, if you have questions about your own long-term investment strategy or portfolio, reach out to your Griffin Black Advisor. We always welcome your questions.
