Our U.S. Public Policy and Valuation, Accounting &
Tax strategists assess the possible scenarios in the
upcoming elections, and what they could mean for both taxpayers
and the market.
----- Transcript -----
Ariana Salvatore: Welcome to Thoughts on the
Market. I'm Ariana Salvatore, Morgan Stanley's US public policy
strategist.
Todd Castagno: And I'm Todd Costagno, Head of
Global Valuation, Accounting, and Tax Research at Morgan Stanley.
Ariana Salvatore: With less than a week to go
until the US election, the race is still neck and neck. Today, we
dig into a key issue voters care about: Taxes.
Todd Castagno: It's Tuesday, October 29th at
10am in New York.
So, Ariana. Taxes are an issue that impact both businesses and
individuals. It's a key component of both candidates plans and
proposals. How have they evolved over the campaign?
Ariana Salvatore: I'd say in general we do tend
to see a lot of overlap between Harris' proposals and the ones
that the Democrats were campaigning on before she took over the
mantle from President Biden in July. That being said, in some
instances, her plans go beyond what was requested in the
president's fiscal year [20]25 budget request.
For example, that $6,000 credit for newborns and the $25,000
homebuyer tax credit. These are areas where we've seen her
campaign go beyond the scope of what Biden was campaigning on
while he was still in the race. Of course, it's important to
remember that any of these proposals would have to pass muster in
a Democrat controlled or a split Congress – meaning that there
will be some tempering of these plans at the margin.
Todd Castagno: So former President Trump
campaigned in his first election on tax policy. He's campaigning
on tax policy in his current campaign. What are his plans and
views?
Ariana Salvatore: We've been talking about the
Republican sweep outcome as the most deficit expansionary from
tax policy changes because Republicans understandably have more
fealty to the 2017 Tax Cuts and Jobs Act.
That law is set to expire by the end of next year. So, in a Trump
win scenario plus Republican Congress, we think you can get most
of that 2017 law extended. While in a Trump win scenario with
divided government, it's probably a little bit narrower. In
general, as I said, deficits skew larger in Republican win
outcomes for that reason, with an asymmetry across the other
election scenarios. That being said, we do still expect to see
deficit expansion in 2026, regardless of who's in power, because
these tax cuts will be extended one way or another.
But Todd, you've done a lot of work in this area and there are
some substantial impacts from a potential corporate rate increase
to think through. Can you give us a little bit of detail on what
that kind of increase would mean for stocks and bonds?
Todd Castagno: Yeah. So, investors have been
very focused on the rate and where it matters and where it does
not matter. So, if you really think about it, most companies that
are exposed to a rate increase or decrease are domestic oriented,
consumer companies, retail companies, you know, hospital
facilities, industrials; those are the most exposed to a rate
increase.
Multinationals this time around are less exposed. So, if we go
back to 2017, we think about it; that was a different story. We
had $2 trillion of trapped cash on the sidelines that did come
back – buybacks, dividends, corporate hiring. You know, this time
around, that's a different story. So there is exposure but it's
mainly consumer-oriented companies.
Ariana Salvatore: That makes sense. And you
mentioned the 2017 almost as a blueprint for what we saw last
time. You mentioned dividends and buybacks.
Do you have any sense of how this time around could be different?
What do we think companies would likely spend these tax cuts on?
Todd Castagno: Well, there are tax cuts. I do
think it's going to be different. I do think the $2 trillion does
not exist. That's not going to happen. So, you're going to have
fewer buybacks, fewer dividends. But you could see some changes
in employment. You could see some changes in investment. Things
like upfront expensing could help boost the economy, higher jobs,
et cetera.
One thing, Ariana. You know, tax cuts are expensive. I think
that's what we've all contemplated for almost 10 years now. How
are we going to pay for these in this new world?
Ariana Salvatore: Well Republicans have proposed
a few different pay forwards. But to your point, we're not in the
same environment as 2017, and we don't expect to see the same
ones that were part of the original Tax Cuts and Jobs Act
negotiations this time around. Specifically, former President
Trump has talked about not extending the SALT cap, which was a
revenue raiser that capped the amount of deductions some
individuals could take between state and federal taxes. That
provision raised about $900 billion over 10 years.
Republicans in general are mainly focused on peeling back some
parts of the IRA – or the Inflation Reduction Act – as a cost
saving measure, as well as letting some of the tax cuts from the
2017 law roll off.
We contrast that with the Democrat sweep outcome, where we could
see a corporate rate increase to 25 per cent in our view, in
spite of Harris’ pledge to bring it up to 28 per cent from the
current 21 per cent.
Todd Castagno: So, we could talk about the
Inflation Reduction Act for a second. You know, that was a bill
that was designed to bring energy, clean energy manufacturing
back to the United States.
It was a very large bill; it was partisan. But what do we think
about in this next election outcome of actually repealing some of
those items?
Ariana Salvatore: It's a great question. And
Republicans on the campaign trail have been talking a lot about
peeling back the IRA. Importantly, in our view, we don't think a
full-scale repeal is likely even in a Republican sweep outcome.
There are a few reasons for that, but mainly because if you look
at where these projects are being located, it's in Republican
held states and districts. And Republicans in the house currently
have said that they're not interested in rolling back the law.
That being said, there are ways to potentially cap the amount of
outstanding money that has not yet been allocated.
And the president could work with the treasury or other federal
agencies to tighten up some of the criteria or the guidance
around accessing some of the tax credits that will limit the
overall deployment.
Todd Castagno: I think the recent Supreme Court
decision also plays into that.
With candidates’ tax plans – I’ve run a lot of numbers from a
company perspective. You've run a lot of numbers top down from a
deficit perspective. What did you come to view?
Ariana Salvatore: We do see deficits expanding
in 2026 and beyond. That's because, in our view, it's not really
in lawmakers’ interest to allow all of the tax cuts – both
individual and corporate – from 2017 to expire. We think the
largest extension, as I mentioned before, comes in a Republican
sweep. But in general, in some form or another, we think that at
least a portion of these lower tax rates are going to stay
around.
That adds $2.8 trillion to the deficit over 10 years on the high
end per our estimates; and $700 billion over 10 years in our
smallest expansion scenario, a Democrat sweep.
So finally, Todd, in either win outcome, what's the timeline of
key tax-related events that investors should be paying attention
to?
Todd Castagno: So, this is the trillion-dollar
question. So, most of the individual side of the tax cuts and
jobs act expires at the end of 2025. There are certain business
provisions that have already started to phase out. There are
certain provisions that are permanent, like the corporate rate.
When will Congress get to this? They will get to it at some
point, but we just don't know when that is. Could it be early
2025? Could it be 2026? And I think investors should pay
attention to that because Congress doesn't always act on time;
and we also don't know what the extensions will look like. Some
things could be extended three years, five years, 10 years. Some
things could be permanent.
So that's the jigsaw puzzle that we'll have to put together after
the election.
Ariana Salvatore: Great. Well, I guess three
things in life are certain – death, taxes, and the fact that we
will be following this issue very closely.
Todd, thanks so much for taking the time to talk.
Todd Castagno: Great to speak with you.
Ariana Salvatore: As a reminder, if you enjoy
Thoughts on the Market, please take a moment to rate and review
us wherever you listen and share the podcast with a friend or
colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.