For the first time, we saw the two presidential candidates former President Trump and current Vice President Harris clash center stage. As we approach the final months before the election, we are getting a glimpse as to each candidates policy platform. For investors, perhaps the most scrutinized area is taxes, and there are concerns over how changes to tax rates could impact both Wall Street and Main Street.
While taxes have a direct impact on 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, there are many deductions, credits, and strategies that 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 their 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.
The future of the Tax Cuts and Jobs Act and national debt is uncertain
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.
The Inflation Reduction Act of 2022 introduced a 15% minimum tax on large corporations with annual profits over $1 billion. It also implemented a 1% excise tax on stock buybacks for publicly traded companies.
Unless there is action taken, 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. Although this is not an exhaustive list here are of the items the candidates are discussing:
Trump proposes cutting corporate taxes further from 21% to 15% for some companies, including manufacturers who make their products domestically.
Harris is in favor of increasing the corporate tax rate to 28%, in line with President Biden’s position.
Trump has discussed extending the TCJA’s individual tax rates, but specifics are still unclear. Harris supports allowing the top marginal rate to revert to 39.6%.
Harris proposes raising the capital gains rate from 20% to 28%. Along 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 Social Security for seniors.
Harris proposes expanding the startup expense deduction from $5,000 to $50,000 and $25,000 in support of first-time homebuyers making down payments.
With complex tax policies and the looming presidential election, it's important to stay focused on your long-term goals rather than get caught up on the emotional swings of our current political and economic environment.
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