Elections, as everyone knows, have consequences. The unexpected consequences of the 2016 presidential election were favorable to both the economy and the stock market. In fact, the economy may be President Donald Trump’s last, best hope for reelection. President Trump is viewed as a competent steward of a pro-American economic policy where jobs and full employment are seen as the silver bullet against the partisan divide.
Nevertheless, there is at least an even chance that the Democrats could win the White House, keep the House of Representatives, and regain the Senate majority. That so called “blue wave” could, according to some strategists, knock the stock market off kilter. Some investors, according to this CNBC piece, are “placing bets that there could be a big upheaval in the stock market” which could result in a big sell-off after the November election.
Yes, President Trump has a good record in the economy and his policies have been better for the health of the market. By contrast, Biden has said he would raise taxes on high earners as well as corporations. A Democrat administration would likely reinstate its traditionally less friendly tax and regulatory policies in the name of populist economic fairness.
The former VP’s tax plan includes raising income taxes on “high-income” individuals who earn above $400,000 annually. The Tax Foundation estimates that his plan would raise real tax revenue by just over $3.2 trillion. With a majority in both houses, Democrats would have the votes to raise capital gains taxes to pay for at least some of the $6 trillion the federal government proposes to spend during the next 10 years.
The downside is that even before President Trump’s tax cuts will have a chance to kick in, Biden’s tax changes could erode around 1.5 percent from the country’s GDP over the long haul. That reduction in GDP equates to over 585,000 full-time equivalent jobs. It also does not factor in tax avoidance/exemption strategies already employed by the wealthy.
Corporations and businesses, in addition to slashing jobs, could pass those tax increases along their supply and consumer chains. That drag could also be reflected in the value of corporation stock as well as lowered investor confidence.
David Kostin of Goldman Sachs weighs in with his evaluation of the Trump tax act: The Trump Tax Act has already lowered the effect rate on S&P 500 companies by 8 percentage points to 19 percent. The tax cut has boosted their earnings by 10 percent, and has accounted for about half of their increase in net profit margins.
David Rosenberg, an economist at a Toronto-based research firm, puts it this way: “The implications for the stock market from this shift to higher taxes are generally negative.”
For politicians it’s all a matter of timing when it comes to taking all of the credit and none of the blame during the volatile ups and downs in an economic system no one—not even economists—fully understands, much less controls. Politicians, like investors, are just along for the ride.
Featured Image by Gage Skidmore
