Election Insight: Macro-Strategy
Evaluating Biden's plan for America
David Joy | Vice President – Chief Market Strategist July 29, 2020
Former Vice President Joe Biden's presidential campaign has released several tax and spending proposals that together supply a rather detailed picture of the policy direction such an administration would take. This report provides a summary of those proposals and outlines some of their potential investment implications. It is important to keep in mind that even if the Biden campaign is successful in winning the White House, there is a significant difference between proposals and policy. How much any administration can accomplish is influenced quite heavily by the makeup of Congress, as well as circumstances in the economy and the country at-large.
The Biden campaign has proposed significant changes to the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA), including;
- The statutory corporate tax rate could rise to 28 percent from the current 21 percent. The TCJA had lowered the rate from 35 percent.
- Institute a corporate alternative minimum tax of 15 percent.
- Reduce the deduction to 25 percent on global intangible low tax income, effectively raising the tax rate to 21 percent from 10.5.
- More broadly, institute various manufacturing tax credits, expand certain renewable energy tax credits, and eliminate fossil fuel subsidies.
- End certain real estate tax loopholes and impose sanctions on tax havens and outsourcing.
- Impose a payroll tax of 12.5 percent (Social Security) on incomes above $400K, half borne by the employer. This would result in the Social Security tax being imposed up to the current limit of $137.7K, followed by a gap up to $400k, and unlimited thereafter.
- Reimpose the pre-TCJA top income tax bracket of 39.6 percent from the current 37 percent.
- Tax dividends and capital gains at ordinary income tax rates for incomes above $1mm.
- The Biden campaign has proposed a $2T first-term spending package designed to address environmental and climate concerns by enforcing and strengthening laws, targeting polluters, mitigating the impacts on the most vulnerable communities of color, and strengthening climate and healthcare infrastructure and preparedness, as well as, investing in the engines of sustainable job creation. Among its provisions are:
- To invest in roads, bridges, railroads, light rail, airports, water, broadband, electric vehicles, wind, solar, batteries, economic electrification, 4mm building energy retrofits, hydrogen technology, nuclear technology, agriculture conservation and land management, clean brownfields, modernize schools, carbon capture, and secure sustainable U.S. supply chains.
- Commit to a carbon-free electric grid by 2035, and a net-zero emission economy by 2050.
- Free four-year public college tuition for families making less than $125K. Free community college and skills training as well as $70B investment in historically minority colleges.
- $15 an hour federal minimum wage ($7.25 currently).
- $400B Buy America procurement commitment.
- $300B investment in new technology R&D.
- 1.5mm sustainable, affordable housing units.
- Enhance the ability of labor to organize.
The Biden campaign has also proposed a $775B program to bolster child and elderly care. Mr. Biden proposes universal pre-school for three-and four-year-old children, would end the waitlist for home and community services under Medicaid, and encourage in-home care alternatives. His plan provides a childcare tax credit of up to $8K for low-and middle-income families. The plan also proposes a pay increase for early childhood educators and elder caregivers, which could contribute to the creation of 3mm jobs. The plan would be paid for by taxing certain real estate transactions and enhanced tax compliance for those with incomes above $400K, including possibly ending like-kind exchanges.
According to the Tax Foundation, the Biden tax plan would raise tax revenue by $3.8T over ten years using a conventional analysis methodology. Under a dynamic analysis methodology, which considers the impact of policy, the plan would raise $3.2T, with roughly half of the incremental tax revenue coming from each of the corporate and individual tax code changes. The Tax Foundation estimates the plan would lower GDP by 1.51 percent over the long-term and cost the economy 585K full-time equivalent jobs. According to the American Enterprise Institute, the tax plan would also raise $3.8T over ten years using conventional analysis, but $3.6T using a dynamic analysis. Mr. Biden's proposal is estimated to reduce GDP over the next ten years by 0.06 percent and by 0.2 percent over the long-term, and according to the analysis would have little significant impact on the budget deficit either in the short or long-term.
Both organization's analysis shows personal income taxes rising in all brackets, but only fractionally for those making less than $400K, and only due to the assumption that some of the increase in corporate taxes will be borne by employees in the form of lower wages. The AEI estimates that 72.2 percent of the first full-year tax increase on individuals will be borne almost exclusively by the top one percent of income earners, resulting in an average after-tax income decline for this group of 17.8 percent. Analysis by Ned Davis Research calculates that the rise in the statutory corporate rate could reduce S&P 500 earnings by 12.7 percent. However, the effective rate paid by corporations is typically lower than the statutory rate, most recently 17.7 percent in 2019. Since the effective rate fell by 6.6 percent following the TCJA, a fifty percent rollback of the reduction in the statutory rate would theoretically raise the effective rate to 21 percent. In that case, the decrease in S&P 500 earnings could fall by 4.2 percent.
The climate and the environment are near the top of Mr. Biden's policy focus, so it stands to reason that alternative energy industries are likely to benefit from a Biden administration, including wind, solar, biofuels, electric vehicle, and battery manufacturers. Construction and engineering companies are also expected to benefit from his emphasis on infrastructure spending. To the extent that immigration policy might be quite different, industries that rely on immigrant labor across the skill spectrum may also benefit. Should trade policy be less focused on the use of tariffs, both importers and exporters may benefit. Certain healthcare providers may benefit as well, including hospitals and elder care providers. The potential industry losers in a Biden administration include fossil fuel companies, especially coal, defense-related industries, big technology as well as big banks (from a regulatory perspective), internal combustion vehicle manufacturers, luxury goods, union-heavy industries.
For a deeper dive into both the energy and healthcare sectors, please see the following Election Insight publications from the Investment Research Group;
"Energy Positioning into the Election," Will Foley, June 4, 2020, and "Healthcare Positioning into the Election," Dan Garofalo, May 13, 2020.
For a historical look at how broader stock averages have behaved in election years, please see our "Committee Perspectives: U.S. Election Guide." This publication examines past presidential election cycles, election uncertainty, and market volatility, and why the makeup of Congress matters, all in graphic form.