- Financial planning for the U.S. presidential election requires careful attention to each candidate's plans, as well as a thoughtful strategy for anticipating any consequences.
- President Donald Trump and presumptive Democratic nominee Joseph Biden are both focused on restarting our economy as well as tax policy, infrastructure and other spending programs.
- From a planning perspective, investors should keep their sights on the long-term secular trends that live well beyond election cycles.
Every four years, as we approach the U.S. presidential election, we reflect on the wide-ranging implications of each potential outcome.
As is always the case, much is at stake during the current cycle, including how best to address the new and old challenges facing our nation. This year, our economic future — as a nation and individually — will certainly be a top consideration.
Our president for the next four years will be tasked with setting the agenda for bringing us out of the worst economic crisis since the Great Depression. Depending on whether he ultimately can secure the support of a constantly changing Congress, his approach could have dramatic repercussions.
President Donald Trump and presumptive Democratic nominee Joseph Biden are both focused on stimulating employment and personal prosperity to restart our economy and overcome the financial hardships endured by so many. And both candidates seem focused on tax policy, infrastructure and other spending programs as the main components of their plans to achieve their economic objectives.
The similarities, however, end there, as the candidates' approaches to these subjects are quite different. In turn, financial planning for the election requires careful attention to the plans of each candidate, as well as a thoughtful strategy for anticipating their consequences.
The bare-bones tax positions of the candidates are that Trump wants to lower taxes, and Biden wants to raise them. During the 2016 campaign, Trump promised to lower corporate and individual income taxes. In 2017, he signed the Tax Cuts and Jobs Act, making good on that promise. Trump has not yet released an outline of a future tax plan, but he has said he wants to add to and extend the TCJA, much of which is scheduled to phase out by 2025.
As for Biden, he has vowed to roll back most of the TCJA, arguing that it was irresponsible and did not stimulate economic growth. Biden has offered a different view on stimulating economic growth. He suggests a $4 trillion tax hike, placing most of the increased burden on businesses and on people earning more than $400,000 annually.
For corporations, he plans to raise the highest income-tax rate to 28%, from 21%, and impose a minimum tax. For pass-through entities and sole proprietorships, he would phase out the TCJA's 20% deduction for qualified business income.
For individuals, Biden wants to raise the top income-tax rate to 39.6% from 37%, cap itemized deductions and increase Social Security taxes on high earners. For those earning more than $1 million, he also wants to raise the capital-gain and qualified-dividend tax rates to 39.6%, from 20%. Along these lines of taxing investment income, he has proposed limiting the ability to engage in tax-deferred like-kind exchanges of real estate and repealing the tax-free basis step-up upon death. For estate and gift tax purposes, he wants to lower the exemption amounts.
So, what does this mean from a financial-planning and strategy perspective?
The answer depends on one's perspective on who will win the election and who will control Congress. It also depends on one's view of how long it ultimately will take to enact any new legislation, which could be delayed intentionally if there is any concern it could impede the economic recovery.
For those preparing for a Trump victory, current strategies are likely to remain viable.
For those assuming a Biden victory, the following strategies should be considered, especially if the Democrats can take control of Congress. Again, however, some of these strategies may be able to wait if it appears that prospective changes will be delayed.
- Accelerate the recognition of long-term capital gains for transactions that otherwise might happen over the next few years.
- Accelerate ordinary income that can be moved to a lower-tax year, especially compensation income such as bonuses that could be subject to increased social security taxes.
- Accelerate itemized deductions (if over the standard deduction).
- Accelerate the use of available qualified business income deductions for pass-through entities.
- Accelerate like-kind exchanges of real property planned for the near future.
- Review and change estate and gifting plans for foreseeable changes involving estate and gift taxes.
- Accelerate taxable corporate transactions that otherwise might occur in the near future.
- Accelerate the payment by corporations of qualified dividends into lower-tax years.
As for other plans, this time we'll start with Biden.
He wants to put $2 trillion towards infrastructure, with an emphasis on promoting clean energy. The program would largely be funded by the above tax hikes as well as increased "carbon taxes" on industries such as oil and gas. Biden's plans call for investing in mass transit, efficient buildings and transportation, sustainable housing and agriculture, and carbon-free power infrastructure.
Health care is also worthy of mention. Biden has not been a supporter of "Medicare for All," but he has been a supporter of expanding the current Medicare program by lowering the age of eligibility. He has also proposed a public insurance option.
As for Trump, he has offered a $1 trillion infrastructure package, likely to be funded with fuel taxes. His plan focuses on more traditional infrastructure such as roads, bridges and water systems but also focuses on wireless infrastructure and rural broadband. Like Biden, he supports spending on mass transit and energy, though, on the latter topic, the president has been less vocal on stimulating clean energy solutions and more vocal about energy independence.
While tax planning around the candidates' platforms may be relatively straightforward, investing around political platforms is less clear-cut. It requires three assumptions:
- Legislation will go through as advertised in the campaign. Concessions usually need to be made from both sides even when one party controls all of Congress. Take, for example, the attempts to repeal the Affordable Care Act. Even in the earliest days of a unified Republican government, repeal efforts failed.
- Companies will be unable to adapt to industry change. As noted above, legislation rarely happens quickly. Impacted industries generally have months — if not years — to adapt and diversify around the opportunities that are created from change. Smart, long-term investments are not typically predicated on a political landscape that potentially changes every two years.
- Ceteris paribus – everything else stays the same. While the concept is a useful tool for economic theory, it rarely prevails. There are many moving parts within the economy, company fundamentals, and other investment variables.
As the general election goes into full swing, some commentators will suggest things like loading up on infrastructure and changing exposures to or within the energy or health-care sectors. Their predictions could make sense if the three assumptions above hold true. A few of them may even work out in the months immediately before and after the election.
We believe that, from a planning perspective, investors should keep their sights on the long-term secular trends that live well beyond election cycles.
From a financial-planning perspective, prudence dictates a consideration of everything that might happen in the upcoming election. It also dictates readiness to react and the resolve not to overreact.
— By Michael Nathanson, chairman & CEO of The Colony Group, and Liam Hurley, intern at The Colony Group and University of Massachusetts Amherst student