Election Day is eleven weeks from tomorrow. In political time, this is an eternity. However, with the White House, about one-third of the Senate, and the entire House of Representatives on the ballot, this election is significant. Particularly because the two presidential candidates have such stark differences in policy perspectives, especially with respect to taxes.
Right now, the polling average puts former Vice President Biden about seven points ahead of President Trump. Data guru Nate Silver's model says Trump has about a 30% chance of winning, which is right about where Silver put Trump's odds on Election Day in 2016.
There are many reasons to doubt the polls, but it's never a waste of time to think about what tax policy would look like with different Administrations and how that would affect the economy. This is especially true today, with many predicting dire market declines if a President Biden would achieve all his policy objectives.
If Biden wins, but the GOP keeps the Senate (right now, Republicans have 53 seats), the answer is easy: very little change. There is simply no way a GOP Senate majority would let Biden raise taxes. Tax hikes would be dead on arrival. The one change Biden might be able make is enlarging the deduction for state and local taxes. Many in the GOP would oppose, because it would lighten taxes more for residents of high-tax states than low tax states, but it still is a tax cut, not a hike.
What many investors are focused on is a scenario where Biden wins and the Democrats also take the Senate. In that scenario, the Democrats could use the special budget process on Capitol Hill to raise taxes permanently (meaning no natural sunset) with a simple majority, like President Clinton did in 1993.
Biden's team has made plenty of tax proposals, but we're going to focus on what we call the Big Five:
(1) Raising the top income tax rate on regular income back to 39.6% from 37%
(2) Raising the corporate tax rate to 28% from 21%
(3) Ending the step-up basis at death
(4) Treating long-term capital gains and qualified dividends as regular income for those earning over $1 million
(5) Applying the Social Security payroll tax on incomes over $400,000+