Here’s A Deeper Dive Into Biden’s Tax Hikes
Now that we know who will tag team against Trump & Pence in November, markets are laser focused on Biden/Harris policy. For investors, taxes are always the one to watch.
Before we dive into that, Predictit.org has Biden’s victory rising with contracts for his win now priced at 59 cents, up from 57 cents and Trump’s price tag dropping to 43 cents. That has held for the last 48 hours. Biden remains in the pole position even two days after picking Harris.
Biden and Harris’s joint appearance on Wednesday seemed to ‘reset’ the Biden campaign, jokingly deemed hunkered down in a basement where he reads from cue cards to avoid gaffes. Harris’s speech, which followed Biden’s “Build Back Better” speech, took a cue from the Democratic Party’s macro playbook and simply blamed Trump’s “failure of leadership” for the reason why millions of people are unemployed.
State-ordered lockdowns aside, “vice presidential candidates rarely have a significant impact on financial markets,” says Thomas McLoughlin, head of fixed income for the Americas at UBS. “We don’t expect U.S. equity or fixed income markets to react to (Harris) because the choice was adequately telegraphed as a real possibility for weeks. Despite Biden’s age—he would be older upon entering office than Ronald Reagan was when he left—the American electorate will focus on the party standard-bearer when marking their ballots,” he says.
The Biden Tax Plan
Taxes are coming back. Both corporate and individual taxes.
If Biden wins, say bye bye to the Russell 2000’s gains. The small and mid-cap firms that don’t have offshore headquarters or are manufacturing a lot of their widgets at home will be hardest hit. Multinationals can duck and cover, setting up headquarters in Ireland (or some such place) for tax purposes.
“It’s a huge negative for the market,” says Brian McCarthy, head of Macrolens in Stamford, Connecticut. Biden plans on hiking capital gains, which is not just about stocks, bonds and dividend checks for fat cats. This also impacts housing sales and business sales.
Outside of changes in how capital gains taxes are counted as income, Biden’s economic plan is promoting an increase to the corporate rate from 21% to 28% – a 33% hike. RBC Capital estimates that this could raise an additional $1 trillion in the next decade through 2030.
The effective non-financial corporate tax rate sank to about 17% just before the pandemic from 23% back in 2016. Taking that tax differential away implies a reduction in after-tax profits of about 7%, RBC Capital Markets economists led by Tom Porcelli wrote in a note to clients this week.
For wage earners and investors, income taxes are going up. But Americans don’t cry for millionaires.
In a Politico poll last year, 76% of registered voters agreed that the wealthiest Americans should pay more in income taxes, too. With sentiment well entrenched on this idea of millionaires paying more to the IRS, it is very likely that the C-corp and the individual income tax rate is hiked for the those with earnings and assets over a few million. Elizabeth Warren’s plan was a higher tax on those with income from wages and investments over $5 million.
Still, the timing of these tax hikes will depend on the pandemic. Biden is unlikely to hike company taxes if states are forcing them not to be in business.
The most under-the-radar item in his plan is the increase in the Social Security earnings cap.
Different than Warren, Biden wants to tax incomes above $400,000 a year at the same 12.4% rate that incomes up to $138,000 are taxed at now. While this would create a small gap (around $20,000 lost in limbo) where the tax would not apply, this gap would close over time and the $400,000 will not be adjusted for inflation, Porcelli says. This line item alone is projected to raise anywhere from $800 billion to another $1 trillion over 10 years.
For financial advisors who often spend more time saving clients from tax loads than they do picking investments, this would represent for high net worth individuals a decent headwind to after-tax income. Small business owners would be in the same predicament. They pick up half of the Social Security tab.
“These two provisions account for more than half of the roughly $3.8 trillion in tax increases proposed by the Biden campaign,” Porcelli says.
Equities will remain richly priced due to low interest rates, still expected in Biden’s term.
“Biden’s tax policy means less entrepreneurial risk taking and slower growth,” says McCarthy. “Higher taxes, higher spending, and super easy money all add up to a weak dollar, which means its ambiguous for equity prices and good for emerging markets. He’s going to have massive spending programs, too. The whole cocktail is more bearish for the dollar than it really is bearish for equities.”