Before March, the Trump campaign hoped that a strong economy would bolster the President’s reelection prospects. Then the coronavirus pandemic caused the sharpest recession in history. Many attributed the economic fallout to the White House’s lackluster public-health response, and the president’s poll numbers hit a trough. Prediction markets now show a 50 percent likelihood that Democrats will win both the Senate and the presidency in November.
Yet the numbers belie the fact that Trump still has an advantage on economic policy. Last week’s jobs report, which showed that the economy added 2.5 million new jobs, cut against predictions of a protracted depression. Stock-market investors, chided by financial commentators as irrationally bullish in April and May, have been vindicated as the market nears its February peak. Even in the midst of a recession, voters still prefer Trump to Joe Biden on economic issues. While CEOs have gone to great lengths to demonstrate support for progressive causes (here a photo of Jamie Dimon kneeling in front of a Chase branch, there a billion-dollar donation from Bank of America), they are finding it difficult to get behind progressive economic policies.
In a research note Monday, the Goldman Sachs Portfolio Strategy team said that investors have shifted their attention from the pandemic to politics, voicing concerns about the consequences of a Democratic victory in November. “Although the coronavirus has caused the sharpest decline in economic activity on record, in some ways tax policy represents a larger risk,” the analysts noted, because a tax hike would impose a long-term drag on the economy as opposed to a temporary shock. The report estimates that Joe Biden’s tax plan would reduce earnings by 12 percent for companies in the S&P 500 Index, largely due to a proposed increase in the corporate-tax rate from 21 percent to 28 percent.
As the economy begins to reopen, “the most important equity market implication” for many investors “is the potential for higher corporate tax rates,” say the Goldman analysts. As the likelihood of a Democratic Senate victory grew in March, the most tax-sensitive sectors, such as financials and consumer discretionary, began to underperform the market. While those stocks have since performed well, they likely will decline as investors begin to price in the possibility of tax reform.
In addition to the corporate-tax increase, the Biden plan would double the rate on Global Intangible Low Tax Income earned by foreign subsidiaries of U.S. businesses and impose a minimum tax on “book income,” which excludes certain deductions. High-income individuals would see their tax rates revert to pre-TCJA levels and would pay a new 12.4 percent social-security tax. According to the Tax Foundation, Biden’s plan would reduce U.S. GDP growth by 1.51 percent in the long term, decrease overall wages by close to 1 percent, and kill 585,000 jobs.
Meanwhile, the coronavirus recession may paradoxically strengthen the GOP’s credibility on economic issues. While congressional Republicans were seen as obstructing the stimulus bills passed in 2009, they pushed through the $2 trillion coronavirus spending package with little opposition. Thanks in large part to Treasury Secretary Steven Mnuchin’s negotiations, the legislation provided swift relief to consumers and businesses, staving off the worst-case recession scenarios.
Biden’s tax reform would come at a time when lawmakers are attempting to bolster the competitiveness of U.S. businesses. Congress is reportedly considering tax breaks and subsidies to firms that relocate foreign operations to the U.S. in order to decrease the country’s reliance on China. An increased corporate-tax rate would hamper those efforts just as tensions with Beijing hit an inflection point. Indeed, the pre-2017 corporate-tax rate of 39 percent, which ranked highest among OECD countries, contributed in large part to offshoring in the first place.
While the economy may not be a “rocket ship,” as Trump said in his Friday press conference, recent economic weakness will likely have a muted effect on the President’s reelection prospects. The GOP’s perennial advantage on economic questions has survived the pandemic.