As the US Presidential elections draw closer, the contrast between former President Donald Trump and Vice President Kamala Harris has become increasingly clear. As such their opposing views and polices could carry very diverse outcomes for the world of finances and the markets.
To investigate the implications of a Trump or Harris win and what their respective policies might mean for the global economy and investments, AFH’s Chief Economist Colin Warren has written a series of informative blogs.
Today, in the second of this week’s five insightful blogs, Colin takes a closer look at the different tax proposals of each Presidential hopeful..
Donald Trump wants to significantly reduce key taxes
The former President’s tax agenda reflects his focus on reducing the overall tax burden for businesses and individuals. Central to his platform is a proposed reduction in the corporate tax rate to 15% from the current 21%.
Trump also plans to make permanent key provisions of the 2017 Tax Cuts and Jobs Act (TCJA), which would otherwise expire in 2025. These measures include maintaining individual tax cuts and extending the business tax terms that were designed to incentivise corporate investment.
In addition, Trump has proposed eliminating taxes on Social Security benefits and reducing taxes on tips.
Kamala Harris could increase taxes for high earners and large corporations
In contrast, Kamala Harris has emphasised more progressive taxation, targeting higher earners and large corporations. She has proposed raising the corporate tax rate from the current 21% to 28%, as well as quadrupling the tax on stock buybacks from 1% to 4%.
Moreover, Harris would only extend the 2017 tax cuts for those earning less than US $400,000 (£306,000) a year, with the result that those earning above this amount would see their marginal tax rate rise to 39.6%. She has also proposed a 28% tax on long-term capital gains for those earning US $1 million or more.
Increased revenues would fund expanded social programs, such as the child tax credit, and provide support for those buying a house for the first time. Harris has also adopted Trump’s proposal to make tips exempt from tax.
Trump has not proposed any conventional revenue raising measures to offset his proposed tax giveaways, although higher revenues from tariffs could be forthcoming (as explained in the first of this five-part series).
Trump’s policy could mean the US has a greater budget deficit
The former President’s agenda is likely to have a bigger impact on the budget deficit than Harris’s. Precise estimates should be taken with a pinch of salt given the lack of detail regarding many of the candidates’ policies.
However, analysis from the University of Pennsylvania indicates that Trump’s plans would increase the budget deficit by US $5.8 trillion (£4.44 trillion) over the next 10 years, while those of Harris would add US $1.2 trillion (£92 billion).
Considering that the annual budget deficit is already running at about US $2 trillion (£1.53 trillion), or 7% of Gross Domestic Product (GDP). This would mark a significant fiscal deterioration from already stretched levels.
Investments may experience volatility, regardless of who wins in November
In themselves, the large tax cuts proposed by Trump would likely stimulate economic activity, but increased debt issuance and inflationary pressures would risk unnerving the bond market and lifting yields, which would provide a check to growth.
The fiscal easing under Harris would be smaller and presumably pose less of a risk to the bond market. However, her focus on lower-income tax cuts and targeted spending could stimulate consumer demand, offsetting some negative effects on business profits resulting from her increase in corporation tax.
In isolation, equity markets would clearly prefer Trump’s corporation tax cut to Harris’s hike, but if worries about debt sustainability trigger a sharp rise in bond yields, it could have a adverse impact on sentiment and valuations.
It should be noted that tax legislation requires Congressional approval, so it will be difficult for either Trump or Harris to implement their tax proposals unless their respective parties secure majorities in both the Senate and House of Representatives – which isn’t guaranteed.
Consequently, there is a good chance that the next President’s tax plans will be reined in by Congress. Indeed, a split Congress that results in failure to extend the TCJA tax cuts could see fiscal policy become a headwind to economic growth.
Get in touch
If you would like to understand how the outcome of the US elections may affect your investments, or discuss your wider wealth more generally, AFH are happy to help.
As one of the UK’s largest independent financial advice companies, our experienced and knowledgeable experts will explain the best options for you in an understandable, jargon-free way, so that you can make more informed decisions. Either contact your existing AFH adviser or call us on 0333 010 0008 to arrange a consultation.
Wednesday 23 October 2024