SCM's Deep Dive: How Tax Proposals and the Election Impact Investors

How Tax Proposals and the Election Impact Investors

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, the most scrutinized area is taxes, and there are concerns over how changes to tax rates could impact both Wall Street and Main Street. How can investors maintain perspective as we approach November 5?

It’s important to maintain perspective this election season.

Tax policy is an extremely complex subject, so 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 of the key differences on taxes between the candidates and their parties come down to the future of the Tax Cuts and Jobs Act (TCJA).

Before discussing the details, it’s essential to maintain perspective around tax policy since these issues can be politically heated. Taxes are intertwined with politics and reflect our polarized political climate.

While taxes directly impact 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.

 Many deductions, credits, and strategies can reduce the statutory tax rate, and 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.

Additionally, election rhetoric and actual policies can be quite different. Candidates often make promises based on political leanings that may not fully materialize once in office. Even once 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 significantly changed 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.

The future of the Tax Cuts and Jobs Act and national debt is uncertain

The truth is that 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 reducing individual income tax rates with the highest rate declining from 39.6% to 37%, nearly doubling the standard deduction, dropping the corporate tax rate from 35% to 21%, and implementing 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 and a 1% excise tax on stock buybacks for publicly traded companies.

Unless the president and Congress take action, many provisions of the TCJA will expire for 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 from 21% to 15% for some companies, including manufacturers who make their products domestically. Harris favors increasing the corporate tax rate to 28%, which is in line with President Biden’s position.

Trump has discussed extending the TCJA’s tax rates, but specifics remain unclear. Harris supports allowing the top marginal rate to revert to 39.6%.

Harris proposes raising the capital gains rate from 20% to 28%. 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 seniors' Social Security.

Harris proposes expanding the startup expense deduction from $5,000 to $50,000 and $25,000 to support first-time homebuyers making down payments.

Harris proposes a new tax on unrealized capital gains for those worth $100 million. 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 will likely 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.

However, the economy has grown over history under both political parties. As discussed earlier, it’s important to remember that who occupies the White House is not the most important factor for the economy and markets, regardless of how counterintuitive that may seem.

Policy changes tend to be gradual due to our political system's checks and balances. Perhaps more importantly, neither candidate is proposing a return to pre-Reagan era tax levels, when the top marginal rates reached as high as 94%.

So, while taxes do play an important role in financial plans, they do not necessarily impact investment portfolios and economic growth the way some might imagine. Investors should continue to work with a trusted advisor and focus on their long-term goals this election season. By maintaining a balanced perspective and avoiding politically driven decisions, investors can better position themselves for success across the evolving political landscape. 

The bottom line? As the election season heats up, investors must maintain their perspective amid heightened political rhetoric and divergent economic proposals from the candidates. While Trump and Harris may propose changes to the tax code, investors should maintain objectivity when crafting financial plans.

If you want to discuss this further, we offer a complimentary 15-minute call to discuss your concerns and share how we can help.

Stordahl Capital Management, Inc is a Registered Investment Adviser. This commentary is solely for informational purposes and reflects the personal opinions, viewpoints, and analyses of Stordahl Capital Management, Inc. and should not be regarded as a description of advisory services or performance returns of any SCM Clients. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Advisory services are only offered to clients or prospective clients where Stordahl Capital Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Stordahl Capital Management unless a client service agreement is in place. Stordahl Capital Management, Inc provides links for your convenience to websites produced by other providers or industry-related material. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third-party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax, or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Copyright (c) 2024 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.