We cannot predict who will win the presidential election in 2020.
The likely candidates are identifiable: The Democratic Party will offer former VP Joe Biden, while the Republican incumbent, President Donald Trump, will try for a second term. But even these seemingly ironclad facts could change before the polls open in November. People, even politicians, get sick, direly so these days, and conventions can turn into free-for-alls. A lot could happen between then and now.
Let’s presume for a moment that the Democratic Party’s contender wins. The party certainly has strong support, bolstered recently by the materialization of social stresses, both novel – like coronavirus – and more deeply entrenched – including police brutality and racial injustice issues. How these play out with the electorate is unknowable as yet, but in many prospective scenarios the liberals have a fighting chance, at the least.
Limiting ourselves to the corporate world, if we awoke in January to President Biden’s inauguration, what changes could we expect? The Democrats’ call for a Green New Deal is feared by some observers as a potential economy killer. However, such a gigantic program would likely be hard to pass, even if the Democrats control Congress – debates could stretch over years, into the realm of interim elections. Policy initiatives, particularly of the grand variety, are never a sure thing.
This factor is good to keep in mind: proposals may stir or rile, but markets react to reality. Until a ‘new deal’, tax law or regulatory change has been signed into law, it’s no more than a threat or a promise. Time passes, the unlikely becomes substantive, and sure things fade in the stretch.
This reality suggests calm calculation and analysis. The effects of any tax rate proposals are easily quantifiable. Nailed firmly to Mr. Biden’s mast is his call to raise the federal tax rate on corporate domestic income to 28%. To recall, under the Tax Cuts and Jobs Act of 2017, the corporate rate was trimmed from 35% to 21%, and Goldman Sachs estimates the median S&P 500 effective rate for 2018 was just 19%. In response to the reform, profits and dividends rose, buybacks flourished, and markets advanced to historic levels.
Then came the coronavirus crisis. The federal government has spent at least $3 trillion to keep the population alive and solvent. As the economy slowly unlocks, the feds may spend another $1 trillion or more to get the ball rolling up to speed. Still, there are bills to be paid and even President Trump’s administration is considering ways to increase the tax take.
Candidate Biden also suggests doubling the GILTI tax rate – an ominous acronym for businesspeople if ever there was one. GILTI aims to gain fair tax revenues on certain types of corporate foreign income, derived by companies that use intellectual property rights to shift revenue into low-or-no corporate tax havens. As not uncommonly occurs, a simple law that even corporations might see as fair has gone awry in practice, and even companies that are behaving properly have been hit with elevated tax bills.
Congress needs to make a few tweaks, and if Mr. Biden is elected, one would involve doubling the GILTI rate. The Democrats also support imposing a minimum corporate tax of 15% on book income, and a payroll tax boost for top-bracket earners.
Goldman Sachs has examined these proposals. If Biden wins and his campaign promises swiftly become law (there’s the key ‘if’ again), Goldman estimates S&P 500 earnings would decline by 12% to $150/share in 2021, versus $170/share today. A spokesman said the Democratic proposal could “affect corporate earnings and equity valuations,” as well, and we must presume they mean infelicitously. Goldman notes that as a rule, increasing the effect tax rate by one percentage point leads to a 1% decline in S&P 500 EPS.
At iQ Capital, CEO Keith Bliss says he worries about potentially higher corporate taxes and their impact on the manufacturing sector, which has been expanding steadily over the last five years. Mr. Bliss doesn’t expect risk to be priced in until Q3, when the election season hurls itself into overdrive.
Higher corporate taxes aren’t necessarily a bad thing. An office-wide poll suggests an acceptance of moderate rises: even the affluent among us seem willing to pay up to cover coronavirus expenses and support urgent social initiatives. We heard the expected concerns, too: how far could it go, what economically deleterious measures might pop up in accompaniment, and would growth and employment be kicked from the top of the government’s to-do list in favor of potentially divisive and destabilizing social schemes.
We counsel a careful review of each candidate’s proposals, tax and otherwise, along with diligent analysis of all likely scenarios – plan for the best, worst and all else besides.