What investors should know about the 2020 political party platforms

A look at the differences between the Republican and Democratic party platforms, and the investment implications of the presidential candidates’ fiscal policies.

23 Sep 2020

Pandemic politics

A global pandemic and a subsequent economic recession have profoundly altered the national political landscape. The novel coronavirus has prevented the two candidates from engaging voters in a conventional campaign. Both President Donald Trump and former Vice President Joe Biden have been obliged to rely more often on social media and designated surrogates to promote their candidacies. And both individuals have been forced to confront the consequences of a public health emergency. The death of Justice Ruth Bader Ginsburg was another unexpected development, thrusting the Supreme Court into the political fray in the final weeks of the campaign.

Biden’s lead over the president in national polls has been remarkably steady, but, as we learned four years ago, polls can be deceiving. The president’s biggest adversary may now be the calendar. Our colleagues in the UBS US Office of Public Policy believe a Blue Wave, in which Democrats capture the White House and both houses of Congress, is the most likely outcome. However, the odds of that happening are only marginally higher than President Trump winning reelection with a divided Congress.

Scenario

Scenario

Probability*

Probability*

Description

Description

Scenario

Blue Wave (DDD)

Probability*

55%

Description

Democrats ride Biden’s coattails to a narrow majority in the US Senate. A tax bill is enacted through budget reconciliation. The maximum marginal rate is raised to 39.6%. The corporate tax rate is raised to 28%, and an alternative minimum tax on book income is levied at 15%. Capital gains taxed at higher rates at higher income levels.

Scenario

Biden (Divided Congress)

Probability*

15%

Description

A less likely scenario where Biden wins but Democrats fail to assume control of the Senate. GOP retains control but its majority shrinks further. Biden implements policies through regulation. Taxes remain unchanged. Expiring provisions of Tax Cuts and Jobs Act unaddressed.

Scenario

Trump (Status quo)

Probability*

28%

Description

Limited progress on legislation. Federal government provides modest amount of fiscal stimulus in final round of relief. Policy through regulation prevails. Tensions with China escalate.

Scenario

Red Wave (RRR)

Probability*

2%

Description

An unlikely outcome, as Democrats are expected to retain control of the House of Representatives. However, if the scenario occurs, expiring provisions of the Tax Cuts and Jobs Act would be made permanent. Defense Department budget would be increased.

 

Republican and Democratic fiscal policies

The enhanced unemployment benefits from the CARES Act of USD 600 per week expired on 31 July. We had expected political pressure to compel Congress to reach a compromise to provide another round of fiscal stimulus before Election Day. Those pleas for additional aid thus far have gone unanswered, overshadowed by the legislative gridlock that often accompanies the final weeks of a presidential election campaign. While a bipartisan group of lawmakers has introduced a bill to appropriate funds for another round of fiscal stimulus, leadership on both sides of the aisle appear reluctant to proceed. The next best opportunity for more federal aid may be the lame-duck session of Congress when it convenes in December.

The failure of Congress to act only highlights the degree to which the two political parties have widely divergent world views. COVID-19 will overshadow other substantive policy areas in the run-up to 3 November, but the two candidates’ fiscal policies are finally receiving the attention they deserve from voters and investors. When the campaign jargon and contentious rhetoric are put aside, the two candidates offer voters clear and unambiguously different perspectives on the policies necessary to promote economic growth and security.

President Trump abandoned the usual practice of endorsing a lengthy campaign policy platform in conjunction with the GOP national nominating convention. Instead, he released an abbreviated written agenda for a planned second term in office. The GOP policy statement is largely aspirational, with fewer details than one is accustomed to seeing from a presidential candidate. The president’s proposed fiscal policies include additional tax cuts for individuals and federal tax credits and deductions for corporations that repatriate jobs to the US from overseas locations. The statement also explicitly supports additional capital gains tax relief through an expansion of the Opportunity Zone program.

Numerous provisions from the Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025, but the president does not discuss how the resulting tax hikes will be averted. Absent additional congressional action, the individual income tax cuts, an increase in the standard deduction, and the expanded child tax credit will all revert to prior levels in just over five years. Voters are left to assume that the president will be able to convince Congress to make the tax cuts permanent.

The policy statement, which was released in conjunction with his acceptance speech, also focuses on the adoption of a more adversarial posture toward China, strict enforcement of immigration laws, and support for law enforcement personnel. While all three are viewed by the GOP as winning campaign strategies, the reference to “ending our reliance on China” suggests that the president is willing to continue to use tariffs as a tool of foreign policy if elected to a second term. He has threatened to selectively impose tariffs upon, and to strip government contracts from, companies that refuse to relocate their operations to the US.

Meanwhile, in a rare instance of tacit agreement with his challenger, the president reaffirmed a desire to cut prescription drug prices, lower healthcare insurance premiums, and require coverage of all preexisting conditions. On the whole, the impact of the president’s policies on Treasury receipts (and on the US economy generally) is difficult to calculate. Whether or not this is purposeful is debatable, but the inevitable conclusion is that a second Trump administration would be similar to the first and forced to rely on deficit financing to accomplish its goals.

In contrast to the president’s abridged policy statement, the Democratic Party platform is a protracted recitation of policies as disparate as the need for federal bankruptcy reform, a Green New Deal, and reinvestment in rural America. The Biden campaign has not released a consolidated fiscal plan but instead weaved his call for higher taxes to partially fund a series of spending proposals related to infrastructure investment, climate change, and an expansion of healthcare coverage. At its core, however, the Biden campaign is focused on strengthening the federal regulatory regime, reversing many of the provisions of the Tax Cuts and Jobs Act, and increasing federal funding of long-time Democratic policy priorities.

The former vice president advocates an increase in the highest marginal tax rate to 39.6%, and higher payroll taxes for individuals earning more than USD 400,000 a year. He also proposes to tax capital gains at the same rate as ordinary income for taxpayers earning more than USD 1 million. The corporate tax rate is targeted for an increase, albeit less than the rate prevalent before the enactment of the Tax Cuts and Jobs Act. The corporate tax rate would increase from 21% to 28%, and an alternative minimum tax of 15% would be levied on companies that report more than USD 100 million in book income.

The Democratic campaign platform also takes aim at the estate tax by recommending a reduction in the exemption to USD 3.5 million and the elimination of the stepped-up basis rule. Tax preferences for the fossil fuel industry would be eliminated, while those for energy efficiency would be increased. With the exception of the payroll tax increase, most of Biden’s fiscal policy platform could be implemented with a majority vote in the Senate through budget reconciliation.

The Tax Policy Center has estimated that Biden’s tax proposals would increase federal revenue by about USD 4 trillion between 2021 and 2030, or 1.5% of GDP over a decade.1 Roughly half of the revenue gain would be derived from higher taxes on US households, with the remainder coming from businesses and corporations. The Tax Foundation expects the Biden tax plan to reduce after-tax income for the top 1% of taxpayers by 7.8%. The top 5% would see their after-tax income drop by 1.1%, with diminishing reductions thereafter as income declines.

The disparity in the two candidates’ fiscal policy platforms is rather straightforward. Absent any details to the contrary, we are obliged to conclude that President Trump would rely on deficit financing to reduce tax rates while simultaneously increasing federal investment in the nation’s physical infrastructure. Biden proposes to reverse the tax cuts enacted in 2017 and redirect the resulting proceeds toward combatting climate change and expanding healthcare coverage.

However, the size and scope of fiscal stimulus planned by a Biden administration are also much larger than the ones contemplated by the president. The net result is to neutralize some of the adverse effects of tax increases on the rate of economic growth. In either instance, whether the president is reelected or voters choose the former vice president, the size of the federal deficit is destined to remain large.

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Investment implications of fiscal policy changes

When thinking about the potential macroeconomic impact of fiscal policy changes, it’s important to keep the current environment in mind. At the moment, economic activity is far below normal, and there is significant slack in the labor market. Many businesses and individuals have lost income and are struggling to service their debts. Against that backdrop, another round of fiscal stimulus is likely to be more effective than if economic conditions were stronger. The risk of “crowding out” private capital, where higher government spending causes interest rates to rise and private-sector spending to fall, is not a concern in the near term.

In some ways, the circumstances today are similar to those prevailing in 2009 at the depth of the global financial crisis. At that time, the Congressional Budget Office produced estimates for the multiplier effect of different policies that were then under consideration.

Type of activity

Type of activity

Low estimate

Low estimate

High estimate

High estimate

Type of activity

Purchases of goods and services by the federal government

Low estimate

0.5

High estimate

2.5

Type of activity

Transfer payments to state and local governments for infrastructure

Low estimate

0.4

High estimate

2.2

Type of activity

Transfer payments to state and local governments for other purposes

Low estimate

0.4

High estimate

1.8

Type of activity

Transfer payments to individuals

Low estimate

0.4

High estimate

2.1

Type of activity

One-time payments to retirees

Low estimate

0.2

High estimate

1

Type of activity

Two-year tax cuts for lower- and middle-income people

Low estimate

0.3

High estimate

1.5

Type of activity

One-year tax cut for higher-income people

Low estimate

0.1

High estimate

0.6

Type of activity

Extension of first-time homebuyer credit

Low estimate

0.2

High estimate

0.8

Type of activity

Corporate tax provisions primarily affecting cash flow

Low estimate

0

High estimate

0.4

The wide range of estimates for each category is a testament to the difficulty of predicting the economic impact of policy changes. However, it is worth noting that many of Biden’s proposed spending increases appear near the top of the accompanying table, while his proposed tax hikes are near the bottom. For every dollar in revenue raised through tax hikes, we would expect at least a dollar in spending, and the net result should be incrementally positive for growth.

It is more difficult to estimate the impact of President Trump’s policies. He would likely face a divided Congress, so his fiscal priorities would not be enacted without broader bipartisan support. As with Biden, infrastructure spending is a potential positive development if a deal can be reached. Deregulation does not fit neatly into this framework; the initiatives undertaken in his first term were likely very positive but not easily replicated in a second term. Barring the implementation of new tariffs, US trade policy is not expected to have as large a macroeconomic impact in a second term.

There is an old saying that “forewarned is forearmed.” In the event that Joe Biden is elected and control of the Senate reverts to the Democratic Party, personal income taxes are expected to rise.

We are also obliged to remind investors to adopt a long-term view, and to avoid emotional decisions in the wake of any election. Although the November election looms large, it should not be the determining factor in constructing investment portfolios. Through a behavior called “negative partisanship,” it’s common to feel more negatively about the other party than you feel positive about your own. In a politically charged election year, this tendency may threaten to override the objective assessment of risk and reward, dangerously skewing investment behavior.

Speak with your financial advisor about how you can position yourself to reduce the impact of politics and policies on your personal financial goals. These effects are likely to be more muted than you might expect. We therefore recommend that investors focus on things that are within their own control. The UBS Wealth Way approach can help to put these decisions into context.

Will we see a drawdown in equity markets if Biden is elected? It’s possible. But in that event, would equity markets recover? We believe they would. The fiscal stimulus envisioned by the former vice president is significant and will resonate over time. Also, equity market drawdowns in the wake of US elections tend to be short-lived, and the decline in values rarely exceed 5%.

Rather than making a wholesale change to your portfolio, one of the best steps you can take is to make sure you have a Liquidity strategy set aside in cash and high-quality bonds to meet the next three to five years of expenses. If, for unforeseen reasons, the election results in an extended bear market, your Liquidity strategy can be spent down, providing you with the funds that you need to live regardless of short-term market fluctuations and allowing ample time for the risk assets in the rest of your portfolio to recover.

For investors simply looking to avoid volatility in advance of the election, we updated our “Campaign Warriors” stock list on 10 September. For other investors—those seeking to make tactical adjustments in advance of the election—we describe the two most probable outcomes below.

The potential for a Blue Wave outcome is on the minds of many investors, who quite naturally wonder whether the prospect of higher taxes will trigger an equity market correction. We readily acknowledge the risk but stress that higher taxes should not be viewed in isolation. Biden’s tax proposals are a means of paying for some portion of his spending initiatives. The Biden proposals in aggregate should boost economic growth, despite higher taxes for the wealthy and businesses.

In terms of sequencing, a Biden victory would likely result in a substantial amount of fiscal stimulus in the first quarter of 2021, which would likely precede the enactment of any tax bill, which takes a significant amount of time to wind its way through the legislative process. It’s notable that the prediction markets have been suggesting a Blue Wave as the most likely scenario since early June, and yet the S&P 500 is up 9% over this period. If investors were convinced that a Blue Wave would be negative for equities, we suspect the market gains would have been more subdued over this period. Also bear in mind that the prospects look good that a successful vaccine could be identified by the end of the year, galvanizing the US economy ahead of any potential tax increases.

The regulatory impact on certain sectors, such as the fossil fuel industry, would be significant. But other sectors could benefit from green initiatives, and the impact on industries with greater reliance on personal consumption would be more limited. Financials would come under closer scrutiny, but we believe the more stringent oversight would be targeted (e.g., a focus on consumer protections) rather than a broader rework of industry-wide regulations.

The next most likely outcome is a status quo election whereby President Trump wins reelection and Congress remains divided: a Republican Senate and Democratic House. In this scenario, we would expect a largely neutral equity market reaction based on the fact that there would be minimal policy changes. Trade frictions could increase, but this could be partially offset by a small infrastructure deal. In this scenario, investors would be highly attuned to the probability and timing of additional fiscal stimulus. The current stalemate in stimulus negotiations highlights the risk of divided government when the economy is weak, and further government support could be helpful.

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Pandemic politics

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