7 Ways the 2020 Elections May Impact Your FinancesSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on July 16th, 2020
By Devone McLeod, CFP®, July 17, 2020
Political candidates and the media have a vested interest in high drama, especially during an election year. The fate of Western Civilization hangs in the balance, right? The rhetoric may get overheated, but elections definitely affect culture, our safety, and the economy.
Below, I discuss seven ways the outcome of the 2020 Presidential Election may impact your finances.
Prior to any analysis, however, I think it’s important to remember two key points:
1. Financial markets can perform well regardless of the political party in power, as my colleague Patrick Doherty detailed in his recent article.
2. Elections do have public policy consequences that impact our financial lives.
The Tax Cuts & Jobs Act, The SECURE Act, and The CARES Act underscore the second point; these new laws have changed how we reduce income taxes, invest for retirement, leave assets to heirs, and give to charity. Future policies will also affect our portfolios and financial plans.
Here are some of the issues at stake in November:
1. Corporate Tax Rates
In 2017, The Tax Cuts & Jobs Act reduced corporate tax rates from 35% to 21%. President Trump wanted to make U.S. businesses competitive globally, believing a lower tax rate would lead to domestic investment and more jobs. In 2018, my colleague George Koeltl, CFP®, gave an extensive talk about how the new law benefits investors and various industries.
The blue bars in the chart below illustrate how U.S. corporate tax rates compared with tax rates in other developed nations, before and after the new tax law.
Joe Biden aims to revert the 21% corporate tax rate to 28% with the goal of generating an additional $1.3 trillion in revenue. If that revenue forecast is accurate, the new money could be used to for additional government spending or to address the national debt (the federal government has total debt obligations that exceed the size of the entire annual national GDP).
2. Top Marginal Tax Rates
The top marginal tax bracket has been an ongoing debate in America for decades. In the 50s, it reached 92%. In the mid-60s, Congress and JFK cut the top tax rate to 70%. Then in the 80s, Ronald Reagan got it down to as low as 28%.
Currently, the highest tax rate is 37%, per the Tax Cuts & Jobs Act. Biden’s goal is to roll back the Trump tax cuts and increase the top rate to 39.6%, where it stood during the latter years of the Obama and Clinton administrations.
This issue directly affects individuals earning more than $518,401 and married couples with $622,051 or more in annual income (based on 2020 tax brackets). Of course, if a tax increase has economic ramifications, other Americans could be indirectly affected.
3. Capital Gains Tax Rates
Capital gains refers to the profits earned on the sale of property or investment. Right now, Americans pay 0%, 15%, or 20% on capital gains (based on income).
Biden wants individuals with income exceeding $1 million to pay marginal income tax rates (currently 37%) on capital gains to raise an estimated $400 billion for the government. Again, if the revenue materializes as the Biden camp predicts, the money could be used for government programs or debt reduction.
Would this change impact ordinary investors with less than $1 million in income? Maybe. The wealthiest 1% of Americans own an estimated 38% of wealth in the stock market. So, raising capital gains taxes on the super-rich could result in slower stock market growth, as the value of a stock is essentially the present value of expected future cash flow.
4. The Next Chair of the Federal Reserve
Trump nominated and appointed the current Chair, Jerome Powell, in 2018, but has often criticized Powell for keeping interest rates too high. Once Powell’s 4-year term is up, both Biden and Trump are likely to nominate a new Chair.
A new Fed Chair will influence interest rates, which affects stock market performance, bond returns, unemployment, inflation, and the future cost of government debt.
5. Environmental Policy & Business Regulation
The Executive Branch of government has been granted a lot of power to create and revoke regulations over the years - a role the Constitution originally granted only to Congress.
Trump’s executive orders on the environment and energy have included mostly deregulation. He has touted pre-COVID job creation as his signature accomplishment and has celebrated increased domestic oil production. A Trump victory would likely be favorable to traditional energy companies and businesses with high transportation and shipping costs.
Biden’s plan for energy and environmental policies revolves around “The Green New Deal” which aims to achieve a 100% clean-energy economy and net-zero emissions by 2050. These policies would likely result in increased regulations, higher prices for fossil fuels, and increased subsidies and tax cuts for green energy.
6. Social Security
The Social Security Trust Fund will run out of money by 2035 or earlier, resulting in up to a 25% reduction in benefits.
President Trump has avoided concrete proposals to address the looming shortfall but has vowed to not cut benefits. In general, Republicans favor pushing back the full retirement age rather than increasing payroll taxes. Truth be told, delaying full retirement age is essentially the same as reducing benefits.
Biden plans to address the shortfall by applying Social Security payroll taxes to income over $400,000. It’s unclear whether his plan would solve the Trust Fund shortfall, because he also wants to boost benefits for low-income earners and retirees who have already collected benefits for 20 years.
As with Social Security, Trump has promised to avoid cutting Medicare benefits, telling fellow Republicans that it will be impossible to win elections after cutting the program so many seniors currently depend on.
Biden’s Medicare plan reduces the required age from 65 to 60, which would result in higher government expenditures and probably lower costs for many people in that age range and the employers who currently subsidize their insurance.
As we draw near to November, it’s important to be prepared for any potential financial changes that could come with a change in the Presidency.
- Congress limits the power of the President
- Veto power gives the president a lot of influence
- Changes in the Senate could have a real impact on policies
- Any tax policy needs congressional approval
- Most campaign promises go unfulfilled
Regardless of who wins the 2020 presidential election, the best way to prepare is through a comprehensive financial plan and a diversified, long-term focused portfolio aligned with your goals.
At Reby Advisors, we always strive to keep you up-to-date and adjust our advice based on current laws and regulations. If you need financial advice, don’t hesitate to reach out. Contact us today!