Historically, the stock market has shown resilience to political shifts in the US, yet investors remain conscious of how the outcome may affect their investments.
With every passing day, investors are increasing their understanding of the candidates’ strategies with glimpses into the potential economic landscapes. The distinct tax plans of Vice-President Harris and former President Trump and their visions for shaping the future of American finance are becoming clearer.
Let’s start with the Democrats
Vice-President Harris has embraced a tax platform that builds on President Biden’s policies, focusing on increasing taxes for high-income earners and corporations while providing relief for middle and working-class Americans.
One of the most significant proposals is raising the corporate tax rate from 21% to 28%. This increase, while not as high as the pre-2017 rate of 35%, would still represent a substantial change for businesses and potentially impact their global competitiveness.
Harris supports increasing the top individual income tax rate to 39.6% for those earning over US$600,000 annually, up from the current 37%. This aligns with the Biden administration’s pledge not to raise taxes on individuals making less than US$400,000 a year.
Perhaps the most controversial aspect of Harris’ plan is the proposed tax on unrealised capital gains for households with a net worth exceeding US$100 million. This would mark a significant shift in how wealth is taxed in the US, and could then impact the investment strategies for ultra-high-net-worth individuals. Harris has emphasised her commitment to strengthening the middle class, proposing expansions to the Child Tax Credit and supporting a “no tax on tips” policy for workers earning less than US$75,000 annually.
Trump and tax cuts
In contrast, former President Trump is campaigning on a platform of extending and expanding his 2017 tax cuts. Trump has floated the idea of further reducing the corporate tax rate to as low as 15%. This would represent a dramatic shift from the present 21% rate and could significantly affect corporate profits and investment decisions.
The former President aims to make permanent the individual tax cuts from the Tax Cuts and Jobs Act that are set to expire next year. This would maintain lower tax rates across income brackets compared with pre-2017 levels. While specific details are limited, Trump’s previous policies favoured lower capital gains taxes, and it’s likely he would continue this approach if re-elected.
What does this mean for investors?
Looking ahead, while these policy proposals provide a framework for understanding each candidate’s economic vision, it’s crucial to remember campaign promises often face significant hurdles in implementation. The composition of Congress after the election will play a pivotal role in determining which policies can be enacted.
Harris and Trump’s contrasting tax plans present voters choice with far-reaching implications. While Harris aims to increase taxes on corporations and the wealthy to fund social programmes, Trump seeks to double down on his previous tax cuts.
Harris’ proposed increase in corporate taxes could lead to reduced earnings for US companies, directly impacting stock valuations. The tech sector, with its significant overseas operations, might feel the brunt of international tax policy shifts more acutely. On the other hand, Trump’s plan to slash the corporate tax rate to as low as 15% promises a short-term boost to corporate profits, providing a potential windfall for shareholders. For investors, the key will be to stay informed and flexible.
The bond markets, too, stand at a crossroads. Harris’ vision of increased social programme spending could necessitate higher government borrowing, influencing interest rates and bond yields. Meanwhile, Trump’s continuation of lower taxes might bolster foreign investment, enhancing the global competitiveness of US firms.
As these policies begin to crystallise, market volatility is expected to increase, particularly in sectors most sensitive to these fiscal changes. For investors, staying informed and agile will be paramount in navigating the shifting landscape and ensuring sustained financial success.
Regardless of the election outcome, there will probably be significant changes to the US tax landscape in the coming years. Therefore, diversification across sectors and geographies remains a prudent strategy to navigate the potential volatility ahead.
The road to November 2024 promises to be a dynamic one for markets worldwide, and staying ahead of these policy shifts will be crucial for investment success.
Jarden Wealth Limited is an NZX advisory firm. A financial advice disclosure statement is available free of charge at jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
Full disclaimer available at: jarden.co.nz/wealth-sales-and-research-disclaimer.
