The U.S. presidential election is now less than five months away, but traders are already trying to figure out if the election will create opportunities in the market.
Tax policy is a major part of any candidate’s platform that can have wide-reaching economic implications. Presumptive party nominees Donald Trump and Hillary Clinton are each constantly telling supporters that their own tax plans will work best for the American economy.
Here’s an in-depth look at the tax plans of each candidate and the type of impact they could have.
Trump is keeping it simple: major tax cuts across the board. Trump plans to consolidate the seven current income tax brackets into four brackets that max out at a rate of 25%. In addition Trump’s proposal includes no income tax whatsoever on individuals earning less than $25,000 per year.
Trump also wants to eliminate the estate tax, the alternative minimum tax, the Affordable Care Act taxes and the marriage penalty.
According to Politifact, Trumps plan would result in an average 17.5% tax cut for the top 1% of earners and a 4.9% tax cut for middle-income Americans.
On the corporate side, Trump wants to replace the eight current tax brackets, which range from 15% to 35%, with a flat 15% rate. In addition, Trump is proposing a one-time 10% repatriation tax on companies with cash stored overseas.
Compared to Trump’s radical overhaul of the tax code, Clinton’s proposed changes are much more modest.
Consistent with her platform, Clinton’s plan targets wealthy taxpayers.
Clinton plans to create a 4% surcharge on any personal income over $5 million and impose a 30% minimum rate on adjusted gross income higher than $1 million.
In addition, Clinton wants to cap itemized deduction benefits at 28%, raise the top estate tax rate to 45% and reduce its threshold to $3.5 million.
According to Politifact, Clinton’s plan would result in an average 5% tax hike for the top 1% of earners and a 0.1% tax hike for middle-income Americans.
For traders, Clinton would maintain the minimum and maximum tax rates on capital gains. However, she proposes extending the minimum holding period for short-term gains from one to two years and the minimum for long-term gains from one to six years. In addition, Clinton would create a number of “medium-term” capital gains rates seen in the chart below.
While President Obama has proposed cutting the highest corporate tax rate from 35% to 28%, Clinton has yet to reveal her position on corporate taxes. She will most certainly do so at some point in the weeks to come.
The tax code is complicated, and figuring out the implications of the candidates’ proposed changes is also complicated.
Politifact estimates that Trump’s plan would essentially result in a massive government stimulus of top earners and corporations. Trump’s plan would reduce federal revenues by more than $10 trillion over the next decade, which is bad news for those concerned about the federal debt.
On the other hand, the corporate tax cuts and repatriation holiday would be great news for companies with lots of cash overseas. Apple Inc (NASDAQ: AAPL) reportedly has $181 billion overseas. General Electric Company (NYSE: GE) and Microsoft Corporation (NASDAQ: MSFT) also reportedly have more than $100 billion each overseas.
Politifact estimates that Hillary Clinton’s tax plan would increase federal revenues by up to $1.1 trillion over the next decade, but much of that revenue would come at the expense of capital gains and top income earners.
At the end of the day, Trump’s plan is more likely to be an immediate boost to corporate earnings, which would theoretically be good news for the stock market. On the other hand, Trump’s plan would also accelerate growth of the nation’s already troubling debt.
Would the short-term benefits of Trump’s plan be worth the risk and potential long-term ramifications for America? That’s up for voters to decide in November.
Disclosure: the author has no position in the stocks mentioned.
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