Cumberland Advisors Market Commentary – Taxes

Author: David R. Kotok, Post Date: October 21, 2020
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There are several policy areas where the differences between Biden and Trump are huge. Climate change policy is one of them, and we have discussed that in the past. Another is taxes.

Essentially, Biden promises he will raise taxation in many ways, with the increases falling on businesses and on Americans with taxable incomes of $400,000 per year and up. Trump has cut taxation in many ways and promises to cut further. For details, see “Where Trump and Biden Stand on Tax Policy,” https://www.wsj.com/articles/where-trump-and-biden-stand-on-tax-policy-11600335001. Americans are comparing the details of the two approaches, along with their probable impacts on businesses, individuals, and the US economy.

We have for you a compilation of articles about this taxation debate. Various views are represented. Note that taxes are tied to deficits. We will start with a link to an updated report from the Committee for a Responsible Federal Budget. They have modeled the deficits coming in a Biden versus a Trump outcome. It is sobering to consider this analysis as you assess forthcoming deficits. See “The Cost of the Trump and Biden Campaign Plans,” http://www.crfb.org/papers/cost-trump-and-biden-campaign-plans.

Now let’s get to the compilation of discussions of taxes. With Joe Biden ahead in the polls, wealthy Americans are bracing for a tax increase even as they evaluate prospects for growth and earnings under a Biden presidency. Here are three related reads:

“It Doesn’t Matter Who Wins the Election – Higher Taxes Are Expected, So Get Ready,” https://www.dedicated-db.com/tax-planning-in-an-election-year/.

“Trump’s Taxes Give Biden Blueprint to Fix System Rigged for Rich,”

https://www.bloomberg.com/news/articles/2020-10-01/trump-s-taxes-give-biden-blueprint-to-fix-system-rigged-for-rich?sref=TG2o5EVv

“Rich Americans Are Protecting Their Fortunes from a Possible Biden Win,”

https://www.bloomberg.com/news/articles/2020-10-09/election-news-richest-u-s-families-seek-tax-savings-before-possible-biden-win?sref=TG2o5EVv

Both Moody’s and Oxford Economics, as reported in September, expect spending and tax changes under Biden to net a faster US recovery.

“Biden’s Spending to Drive Faster U.S. Recovery, Economists Say,”

https://www.bloomberg.com/news/articles/2020-09-24/biden-s-spending-to-drive-faster-u-s-recovery-economists-say?sref=TG2o5EVv

Analysts at the Tax Foundation, on the other hand, suggest that Biden’s tax policies will result in a 1.47% reduction in GDP over the longer term:

“Details and Analysis of Democratic Presidential Nominee Joe Biden’s Tax Proposals,”

https://taxfoundation.org/joe-biden-tax-plan-2020/.

An American Enterprise Institute (AEI) analysis reported on Fox Business on October 14 found that Biden’s proposed tax plan would increase revenue by $2.8 trillion. “As a result of these taxes, the top 1% would see a reduction in after-tax income of 14.2%, taxpayers between the 95th and 99th percentile would see a small reduction in after-tax income, and everyone else would see an increase in after-tax income ranging from .5% to 11.3%.” But the AEI foresees other secondary impacts that erode those apparent tax savings among lower- and middle-income taxpayers.

“How Biden’s corporate tax rate increase would affect Americans,”

https://www.foxbusiness.com/economy/how-bidens-corporate-tax-rate-increase-americans

The Urban-Brookings Tax Policy Center (TPC) revised its own March 2020 analysis of the implications of the Biden tax plan based on pandemic impacts and the Biden campaign’s tweaks to its plan, particularly tax breaks aimed at Americans who fall into lower- and middle-income brackets. The TPC lowered its estimate of the anticipated tax revenue increase under Biden’s plan from $4 trillion to $2.4 trillion, in contrast to the AEI’s estimate of $2.8 trillion. About 60% of the increased tax burden under the Biden plan, of course, falls on businesses.

“Biden’s Tax Plan Would Raise Just $2.4 Trillion, Report Says,”
https://www.bloomberg.com/news/articles/2020-10-15/biden-s-tax-plan-would-raise-just-2-4-trillion-report-says

The TPC also found that “Those in the top 1 percent of income, who have income of more than $788,100, would see a reduction in their after-tax incomes of 15.9 percent, while those in the bottom fifth of income, who have income of less than $24,800, would see an increase in their after-tax income of 5.2 percent….”

“Tax think tank lowers revenue estimate of Biden’s tax plans to $2.4T,”

https://thehill.com/policy/finance/521216-tax-think-tax-lowers-revenue-estimate-of-bidens-tax-plans-to-24t.

CNBC noted that the increase in after-tax income extends to the middle class, according to the TPC analysis: “Those in the middle, earning between $50,000 and $89,000, would see a tax cut of $620, while those making between $89,000 and $160,000 would see a cut of $420.”

“Biden tax plan gives $620 tax cut to middle class, new study says,”

https://www.cnbc.com/2020/10/15/biden-tax-plan-gives-620-tax-cut-to-middle-class-new-study-says.html

Politico digs into the details of the Biden tax plan to find that middle class tax relief under Biden’s tax plan will disappear when a temporary increase in the child tax credit, from $2000 to $3000 or $3600 depending on a child’s age, expires.

“Biden’s proposed tax increases have shrunk, analysis says,”

https://www.politico.com/news/2020/10/15/biden-tax-increases-429630

The Wall Street Journal lays out the Biden campaign’s strategy of increasing taxes on only 1.8% of Americans, but also points out, “Tax economists estimate that corporate tax increases affect people across the income spectrum—in the short run, people who own corporate stock and, potentially, over a longer period, workers as companies limit wage growth.”

“Why Biden Would Start Tax Increases at $400,000 a Year,” https://www.wsj.com/articles/why-biden-would-start-tax-increases-at-400-000-a-year-11601730000

Moving away from taxes, Moody’s Analytics tackles an analysis of the macroeconomic impacts of four different election outcomes, ordered from most likely to least likely, as follows. You will want to read this analysis in detail. Interestingly, Moody’s anticipates highest GDP and job growth under a Democratic sweep.

“The Macroeconomic Consequences: Trump vs. Biden,”

https://www.moodysanalytics.com/-/media/article/2020/the-macroeconomic-consequences-trump-vs-biden.pdf

Goldman Sachs concurs.

“Goldman Sachs: A Democratic sweep would mean faster economic recovery,” https://www.cnn.com/2020/10/06/business/economy-election-blue-wave-goldman-sachs/index.html

For investors, election results will drive portfolio strategy. We close with a useful overview of the portfolio implications of a Biden win vs. a Trump win, from Reuters: “Biden basket vs Trump trade: Picking a presidential stock portfolio,”

https://www.reuters.com/article/us-usa-stocks-election-analysis-idUSKBN26J0GZ.

We suggest that readers take a deep dive into the weeds on all these issues, as we have been doing for some time now.

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio


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