In the upcoming presidential election, the outcome of tax policy will be an important issue for the market.
Evidence of this was on full display in the bond market last week, when worries about a widening budget deficit sent Treasury yields soaring as investors began to price in President Donald Trump’s likely reelection following Joe Biden’s lackluster debate performance.
“This is one of the most important policy issues of the last decade,” Greg Valliere of AGF Investments told me.
Here’s why: Several provisions of the Tax Cuts and Jobs Act of 2017 that lowered the corporate tax rate from 35% to 21% and reduced tax rates for individuals are set to expire next year.
President Biden’s budget proposal, released earlier this year, calls for imposing a 25% minimum tax rate on the wealthiest Americans and raising the top income tax rate to 39.6% on those making more than $400,000 a year.
For corporations, President Biden has proposed raising the corporate tax rate to 28%, though that rate could be lowered to 15% if the Republicans win a majority.
Remember, enthusiasm for the tax cuts helped drive the stock market higher in 2017, and Wall Street believes a reelection of President Trump would make it more likely the tax cuts would be extended.
But experts warn that this week’s market action means the outlook may not necessarily be a home run for investors.
Truist’s Keith Learner told me that the tax cut extension is not necessarily good news for the markets, emphasizing the importance of investors not overlooking bond watchers when assessing the risk of rising debt.
“There’s always the possibility that the bond market will view a candidate’s plans to cut taxes, extend current policies or increase spending negatively,” Learner said.
For investment strategists, the impact of higher tariffs could temper enthusiasm over tax cuts and deregulation, said Solita Marcelli, chief investment officer at UBS.
As a result, “interest rates and the dollar are likely to rise initially,” Marcelli wrote in a client note.
But it’s important to remember that it’s still early, and that markets may be getting ahead of themselves by assuming that a Republican landslide victory guarantees tax cuts.
Valliere believes both parties are “starting to balk” at extending the tax cuts as more Republicans become concerned about the worsening fiscal situation.
The Congressional Budget Office (CBO) estimates that extending the Tax Cuts and Jobs Act would increase the budget deficit by $4.6 trillion over the next decade, $1.1 trillion more than previous estimates. The U.S. federal debt now stands at more than $34 trillion, and the government is expected to spend about $900 billion in interest payments in 2024.
Sheena Smith Anchor for Yahoo Finance. Follow Smith on Twitter translatorHave a tip on a deal, merger, activist situation or anything else? Email me at seanasmith@yahooinc.com.
Bradesco head of equity strategy Ben Laidler told Yahoo Finance editor in chief Brian Sozzi on his podcast, “The Opening Bid,” that there’s nowhere to escape overseas given the uncertainty of the U.S. election. Listen below:
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