Biden Policies to Impact Stock Markets – Part III

The American Families Plan and what it might mean for investors

 

Will the policies of the Biden Administration have a negative or positive impact on the stock market? A prevailing view – by about half of the country – is that a Biden Administration will have a positive impact. Another prevailing view – also by about half of the country – is that it will be negative.

Well, no matter your political affiliation, the U.S. stock markets have performed well since the beginning of the year as through the end of May:

  • The DJIA is up over 12% YTD;
  • The S&P 500 is up almost 12% YTD;
  • NASDAQ is up almost 7% YTD; and
  • The Russell 2000 is up almost 15% year YTD.

And although the impact that the Biden Administration will have on stock markets won’t be settled for quite some time, it is important to remember that 5 months is a too short a period of time to draw conclusions.

Nevertheless, let’s examine a few of President Biden’s policies that will likely impact stock markets – being careful not to draw conclusions as to whether the impact will be negative or positive.

Things to Remember

First, remember that no political party has been exclusively great or awful for stock markets. And while many might view Republican presidents as more bullish for markets and Democratic presidents as more bearish, the data doesn’t support those views.

Further, while presidential policies do matter, the reality is that policies will not impact sectors, industries and markets uniformly. In other words, there will be certain sectors, industries and markets that emerge stronger and certain ones that emerge weaker.

The American Families Plan

At the end of March, President Biden proposed the American Jobs Plan, which would increase income taxes on corporate profits. The increased taxes are being proposed to help fund the plan’s infrastructure goals, estimated to cost more than $2 trillion, although that number is expected to decline.

The details of the corporate tax changes can be summarized into three broad categories and include:

  1. Higher corporate taxes;
  2. New minimum taxes on income and profits of multinational corporations (helping to eliminate profit-shifting to tax havens outside the U.S.); and
  3. Ensuring that large corporations pay their fair share of taxes.

Higher Corporate Tax

The Biden Administration proposes increasing the corporate income tax rate from the 21% level in effect since 2018 to 28%. In support of such an increase, the Administration points to the fact that a 28% tax rate is still significantly lower than the top corporate effective rate of 35% that applied from 1994 to 2017.

Fighting Profit-Shifting to Tax Havens

A hallmark of the Biden plan is to eliminate the benefits of U.S. corporations from moving assets and profits offshore to countries with lower taxes rates than those in the U.S.

The plan’s 21% tax is particularly focused on global intangible low-taxed income (GILTI), which happens when companies shift profits to low-tax jurisdictions. In addition, the Administration is hoping that other countries will help create a global minimum tax to discourage such practices going forward. Finally, deductions for the expenses of “offshoring” jobs would be eliminated and tax credits would be granted for bringing those jobs back to the U.S.

Paying Their Fair Share

The Biden Administration also aims to ensure that all corporations (and wealthy individuals) pay their fair share of taxes. And to help ensure that this is the case, the Administration’s proposal calls for increased IRS funding to ensure enforcement of tax laws by corporations and high-income individuals alike.

The expectation is that more auditing and stronger enforcement of tax laws will add hundreds of millions to the tax coffers from previously unpaid tax liabilities.

 Parts I, II and IV

Part I in this series looked at other ways the Biden Administration’s policies might impact the stock market and include:

  • Huge government spending policies which could push inflation higher;
  • Infrastructure policies;
  • Energy policies;
  • Healthcare policies; and
  • Foreign policies.

Part II summarized the American Rescue Plan Act, which provided cash payments to individuals and also changed a few tax laws.

Part IV will summarize the American Family Plan (proposed).

Because all of these policies individually and collectively may have significant implications for the economy, stock and bond markets, and your retirement assets.

 

Important Disclosures

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Past performance is no guarantee of future results.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This article was prepared by FMeX.

 

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