Authors’ note: Fisher Investments’ political analysis is intended to be nonpartisan and focuses exclusively on political developments’ potential market impact. We favor no party, politician or ideology and believe political bias hampers economic and political analysis.
With 2019 nearly halfway through, 2020’s US presidential election is starting to take shape. Nearly two dozen Democratic presidential hopefuls have thrown their hats into the ring officially, with more entries possible. Such a crowded field means each candidate is clamoring for media attention. One surefire way of getting it? Talk taxes. Potential tax hikes and changes rank high on candidates’ platforms thus far, stealing voters’ attention—and, potentially, stoking fear. But November 2020 is still far away. Much will change as the field narrows and politicians’ stances evolve. Overrating tax rhetoric now seems like worrying prematurely—and, quite possibly, unnecessarily.
Most Democratic hopefuls favor hiking taxes on the wealthy. However, the details vary. Senator Elizabeth Warren proposed a 2% annual “wealth tax” on Americans with more than $50 million and a 3% tax on those with net worth over $1 billion (on top of taxes they already pay). Senator Bernie Sanders suggested imposing a tax ranging from 45% to 77% on estates above $3.5 million. He and fellow candidate Senator Kirsten Gillibrand proposed a 0.5% tax on stock trades and a 0.1% tax on bond trades. Meanwhile, Senator Cory Booker floated creating a savings account for every child by increasing capital gains and estate taxes. Former Colorado Governor John Hickenlooper and others also target capital gains, arguing for the elimination of the lower rate investors pay on gains for securities held more than 12 months. Senator Kamala Harris suggested giving middle-class households cash payments of $6,000 a year per family, offset by repealing 2017’s tax reform.
Depending on your political bent, these ideas may sound wonderful or terrible—maybe even downright frightening! Investors have a long history of fretting capital gains rate hikes, much less elimination of the concept of preferential rates for investments. But cheering or fearing potential change today is futile, in Fisher Investments’ view. For one, it is really, really early in this race. Donald Trump didn’t even enter the 2016 race until June 16, 2015. One month prior, RealClearPolitics’ 2016 GOP primary polling data showed former Florida Governor Jeb(!) Bush in the lead, with Senator Marco Rubio and former Wisconsin Governor Scott Walker tied for second.[i] Walker didn’t last to 2016, dropping out six months after the poll. Rubio and Bush survived to early 2016, but neither lasted past March. Hence, getting invested in early frontrunners—or their tax plans—seems off to us.
But it isn’t only presidential hopefuls that may change before next November. Their proposals could, too, depending on how they poll. While each candidate will likely argue their tax plan is crucial for combating inequality, overturning Trump’s allegedly reckless cuts or ensuring economic policy direction, they likely aren’t married to ideas that don’t motivate voters. That, after all, is what these plans are about—getting attention. It is why America’s tax code is an election issue pretty much every four years. As GOP nominee, former President George W. Bush campaigned on tax cuts in 2000. His opponent four years later, former Senator and Secretary of State John Kerry, campaigned on repealing them (for select earners). So did former President Barack Obama in 2008 and 2012! And then, of course, 2016. We could go back further. Taxes are arguably the most direct way government “interacts” with voters. These plans grab voters’ attention—hence, they are crucial opportunities for Democratic candidates to differentiate themselves from the (large) crowd this early in the race. The flashier and more headline-grabbing, the better. It is performance art, not policy.
While the election is far off, any of these tax plans becoming reality is even further. History suggests unseating Trump will be tough sledding. Incumbents lost just three times since the 22nd Amendment took effect in 1951, limiting presidents to two terms. Even if a Democratic candidate wins, their tax plan wouldn’t get far without a Democratic Congressional majority. Getting one would require them to retain House control in 2020—and pick up at least three Senate seats. Passing a tax bill then would require all 50 Democrats to vote in favor (along with the Vice President, who would break the tie). No defections. On an issue like tax hikes, you cannot take that for granted.
Even if all these stars aligned, it doesn’t mean the final law would automatically resemble today’s headline proposals. A Republican Congress with a slim majority took nearly a year to pass a watered-down version of their earlier tax reform proposals. Obama’s 2008 campaign promise targeting repeal of the Bush Tax Cuts went similarly. Despite having Democratic majority his first two years, he wound up extending them. Only in 2013 was he able to make changes, which actually preserved most of the cuts. Results often differ from campaign-speak.
Ultimately, while we don’t favor tax hikes, even if one follows the 2020 election, it would have to be quite extreme to reap material economic harm in Fisher Investments’ view. (Don’t buy estimates of these plans that fail to scale moves against the economy, either—most tax hikes or cuts would be “the largest in history” in dollar terms considering GDP’s tendency to grow over time.) Tax changes create winners and losers and can impact the economy to an extent, but our historical data suggest they aren’t as huge as many portray. Since 1950, US GDP growth has averaged 2.6% annualized in the four quarters post-tax hike.[ii] Quarterly growth in periods that do not follow hikes averages 3.2%.[iii] Growth was lower following hikes, but not alarmingly so. So while tax hikes may be a big political issue, for the economy, it isn’t so huge at all.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.