November Rain – Election time – October 12, 2020

Winston Churchill once said, “No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government, except for all those other forms that have been tried from time to time.”

 

Let me proudly acknowledge that the U.S. is the world’s wealthiest nation and is the leader of the free world. When disaster strikes around the globe, it is the U.S. and her citizens that generously offer aid.

Today, the U.S. faces tough choices at home and abroad. I am not a political or foreign affairs analyst. I’ll leave it to you to decide how these weighty issues might be addressed.

My top priority is to be your financial advisor. Therefore, I will carefully and cautiously review the current contest through a very narrow prism – through the eyes of a dispassionate investor that doesn’t take sides.

The market owes no allegiance to a political party or creed. Longer term, the market focuses on the economic fundamentals, Federal Reserve policy, and corporate profits and losses. It rewards success. It punishes failure.

Conventional wisdom suggests that investors prefer Republicans, who typically support more pro-business policies, tax cuts, and less regulation. Yet, stocks have historically performed well when either a Democrat or Republican is at the nation’s helm.

While a Democratic win may mean higher corporate taxes and new regulations, we might also see a lessening of trade tensions and new fiscal stimulus.

Between now, election day, and beyond, any number of headlines could swing market sentiment. Longer term, the economic fundamentals determine the direction of stocks.

An expanding economy fueled by innovation and entrepreneurship has been the biggest driver of stocks over the many decades. That doesn’t seem likely to change soon.

That said, let’s take a brief look at the Biden tax plan, as outlined by the Tax Foundation, which is an independent think tank founded in 1937.

The Biden plan would raise taxes by $3 trillion over the next decade. Components include:

• The plan would increase the corporate tax rate from 21% to 28%.

• It would raise the top tax bracket from 37% to 39.6%.

• There would be a 12.4% increase in the Social Security tax on earned wages over $400,000, which would be evenly split between the employer and employee.

• It would tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million. Currently, the long-term capital gains and qualified dividends tax rate maxes at 20% (excluding the Medicare surtax)

• There could also be an increase in estate tax rates, a reduction in the estate exemption, and a repeal of the basis step-up heirs currently receive upon the donor’s death.

The points above are a brief outline, and much more is in his plan. A Biden win and a Democratic takeover of Congress would be needed to make significant changes in the law. If such an event occurs, taxes will likely go up, but details may change as his plan winds its way through Congress. If Republicans maintain the Senate, major changes are probably on hold.

Created 2020-10-12 20:56:13