Tax Plans Don’t Tax Markets

Editors’ Note: MarketMinder favors no political party nor any candidate. We assess developments for their potential economic and market impact only.

With campaign season in full swing, pundits are diving deep into both candidates’ proposals—especially on taxes, some hyping potential changes as a source of market risk. We see this on both sides of the political aisle, with far-fetched explanations for why either candidate’s tax plans—or even no action at all—risks sinking the economy or stocks. While this isn’t unusual during elections, it is vital to avoid the errors in presuming such proposals will become law or have a preset or automatic market impact.

We get why people want to parse tax plans. They are disparate and scattershot, and it is rational to want to assess the potential winners and losers. Former President Donald Trump’s proposals include extending the temporary provisions in his 2017 Tax Cuts and Jobs Act (TCJA), locking in the increased standard deductions, zero personal exemptions, consolidated income tax brackets (most with lower rates) and child tax credit (CTC), among others.^[i]

However, there is one provision he advocates sunsetting: the $10,000 cap on State and Local Tax (SALT) deductions, which hit high earners and homeowners nationwide. He has also floated ending the double taxation of American citizens living abroad, deducting auto loan interest and removing taxes on tips. And on the business side of things, his plans include reducing the corporate tax rate from 21% to 20% (or to 15% for corporations that make their products in America) and imposing a 10% universal tariff on all imports, with larger tariffs targeting goods coming from China.^[ii]

Vice President Kamala Harris’s campaign carries forward a decent portion of President Biden’s proposed 2025 fiscal year budget—with notable tweaks. She proposed raising the corporate tax rate from 21% to 28% and the capital-gains tax rate on households with annual taxable income exceeding $1 million from 23.8% to roughly 32.0%. Her team also supports a so-called “billionaire minimum tax,” requiring taxpayers with a net worth above $100 million to pay a minimum 25% tax on unrealized gains accrued on stocks, property, privately held companies and other assets.^[iii] Harris has also repeatedly endorsed expanding the CTC from $2,000 to $6,000 per eligible child for families with newborns and reinstating the pandemic-era expanded CTCs for all other eligible families along with a $25,000 credit for first-time homebuyers. Oh and she, too, talks of making tips tax-free, with some exceptions.

There is, curiously, a third option that involves changes. Regardless of who wins, if the new administration doesn’t enact a new law before midnight on December 31, 2025, many provisions in the 2017 TCJA will sunset. Several tax rules in place prior to January 1, 2018 will resume, lifting most individual rates and nearly halving the standard deduction, though the lower 21% corporate tax rate will remain intact.

Very few observers seem enamored with any of these plans. Virtually no one supports the do-nothing option, but the investment-world buzz around each candidate’s plans isn’t much rosier. Many couch Harris’s proposals as anti-business, targeting investors and America’s wealthiest. One Wall Street Journal op-ed even suggested that higher corporate and capital gains taxes would devalue Americans’ investments, suggesting Harris was “eyeing your 401(k).”^[iv] (In our experience, a sentiment investors wrongly interpret as supporting the end of 401(k)s’ tax deferral or otherwise grabbing them, which is nowhere in these proposals and wouldn’t stand a snowball’s chance of passing virtually any conceivable Congress.) Meanwhile, beyond the usual critiques of Trump’s tariffs as inflationary and market-crushing, analysts concede some benefits for businesses but have a dim view of the effect on the majority of the economy, projecting deficits that would drive faster inflation and offset the purported positive effects.

We agree that, as laid out, each candidate’s plans would create winners and losers. However, we think it is a bridge too far to extrapolate this observation into specific market outcomes. For one, doing so assumes US politicians always fulfill campaign promises—not true. Perhaps the most famous recent example was George H.W. Bush’s infamous campaign pledge in 1988: “Read my lips: No new taxes.” He flipped in 1990. While campaigning for a second term, Barack Obama proposed ending most of the “Bush tax cuts.” These, like 2017’s, were scheduled to expire in 2013. But after market handwringing over a “fiscal cliff,” Obama signed Congress’s bill extending most of them. More recently, Trump’s 2016 campaign championed repealing the alternative minimum tax, yet he only limited its scope by raising the income threshold.

Campaign tax plans are a lot like presidential budgets: symbolic. Congress holds the power of the purse. Sometimes lawmakers use the presidential budget as a starting point, then mark it up according to their own whims. Sometimes they just point and laugh at it, then do their own thing. Investors can’t know now how Congress will look in 2025, which is key to whether the presidential budget goes anywhere.

Congress is narrowly split now and historically inactive. We doubt the election brings huge shifts in either chamber, but whether we have a single-party government or another split remains to be seen. Even a partisan sweep doesn’t guarantee safe passage for presidential tax plans. Intraparty divides can scuttle them, as happened in both 2021 and 2017. While Biden’s Inflation Reduction Act passed in 2021, intraparty opposition removed its capital gains tax hikes. And in 2017, intra-GOP dissention watered down the TCJA’s individual income tax changes.

Now, presidents can enact tariffs unilaterally, but there are some obstacles. Unilateral action requires national security or dumping as justification. Trump’s new, all-encompassing 10% levy doesn’t easily fit either. Assuming he wins and pursues the tariff, it would likely require Congressional approval or slapping thousands of tariffs on thousands of products. Smells like a very long and uphill legal battle to us. And, if Trump’s first term is any indication, such moves would play out under a bright media spotlight, limiting surprise.

Even if these proposals pass as described—or the 2017 tax reform expires—don’t presume it has a preset market outcome. Taxes are just one factor, of many, affecting businesses’ earnings, individuals’ disposable income and how money flows in general. Most businesses are great at navigating the tax code thanks to many years of using credits and deductions to chip away at corporate tax rates. Moreover, Trump’s and Harris’s proposals have been headline news for months, and any legislation will garner even more eyeballs along the way. This gives stocks, efficient discounters of widely known information, plenty of time to factor in their likely effect.

This is probably why bigtime US tax cuts haven’t historically been automatically bullish, nor tax hikes bearish. The TCJA lowered individual income and corporate taxes beginning January 1, 2018, but this didn’t prevent US stocks from falling that year. Nor did Ronald Reagan’s 1987 Tax Reform Act—which also lowered income and corporate taxes—stop a bear market that year. Conversely, huge corporate tax hikes in the early 1940s and 50s didn’t stop ongoing bull markets. Capital gains taxes don’t have these prescribed powers either: In 1979, Congress lowered the individual rate from 35.0% to 28.0%, then to 20.0% in 1981. This didn’t prevent a nearly two-year bear market from November 1980 – August 1982.^[v] The capital gains rate stayed there until 1986, then Congress raised it back to 28.0% in 1987, where it stayed for a decade. Now, the latter stretch included two short and sharp bear markets—unrelated to taxes, in our view. But higher capital gains didn’t stunt US stocks, which outperformed global stocks cumulatively from 1987 – 1997 as Tech boomed.^[vi]

So don’t overrate candidates’ vague tax plans as economic or market drivers. For investors, it isn’t all about what a potential president says they want to do. It is about what they can do, what the scope of that change actually is and how that relates to what markets have already pre-priced.