Harris vs. Trump: tax policy - Economic Futurist Andrew Busch

Politics & Policy, 2024 Election

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Wise investors were preparing for a tumultuous 2024 presidential campaign. The election season is living up to the hype. Days after President Trump narrowly escaped an assassination attempt, President Biden stepped out of the running, caving to sustained pressure that haunted him since the first presidential debate. In the aftermath of Biden’s withdrawal, a chorus of Democratic voices quickly threw their support behind Vice President Kamala Harris. Her candidacy signifies a pivotal moment in U.S. politics, potentially reshaping the Democratic platform and signalling a shift in the party’s future direction.

As we continue our series analyzing the economic growth opportunities stemming from presidential policies, we shift our focus on the Democratic side of the ticket to Harris.

Overall, Vice President Harris has served as a faithful advocate and promoter of Biden Administration policies. She continues to extoll the virtues of “Bidenonomics,” the catch-all phrase for Biden’s policy mix of heavy government stimulus, green infrastructure, and industrial support. This policy framework has been credited with bolstering economic recovery post-pandemic, though it has also faced criticism for contributing to rising inflation and national debt. Investors should not expect any substantial shift away from Biden’s policies nor from his emphasis on organized labor and environmental interests.

At the same time, Vice President Harris’ record does distinguish her from Biden in meaningful ways. Three areas that point to the most divergence are trade, healthcare, and climate. Harris was one of just 10 U.S. senators to vote against the US-Mexico-Canada Agreement, and her views as a trade skeptic outflanked many of her colleagues in the Democratic Party. Harris also previously proposed a Medicare-for-All plan, a favored dream for progressives that largely failed to gain traction with Biden. Finally, Harris signed onto the Green New Deal, an ambitious climate change strategy that proposed trillions in spending and shortened timeframes for the transition to full carbon neutrality.

These distinctive policy positions highlight Harris’s progressive leanings, particularly during her first presidential campaign. However, as she steps into a more central role within the Democratic Party, she may pivot towards more centrist policies to appeal to a broader electorate, especially in key swing states. This balancing act between progressive ideals and centrist pragmatism will be a defining feature of her campaign strategy, aiming to unify the party while appealing to a wider voter base.

Harris’ divergent positions on trade, healthcare, and climate must be viewed through the lens of her first candidacy for president. Prior to 2020, Harris was among a slew of challengers competing against Biden. Her stances at the time appealed to the progressive wing of the party and sought to distance her from the moderate, blue-collar appeal of Joe Biden. Today her position within the Democratic Party is radically different – and she maintains much more leeway to hew towards the center.

As we dive into details of tax policy, Harris is largely expected to toe the party line and ensure her message appeals to the pivotal, moderate swing states. The Harris campaign will be at pains to ensure the policy conversation is focused on contrast with Donald Trump, not her former differences with Biden.

Vice President Kamala Harris

With her newfound status as heir apparent, Kamala Harris’s tax policy is set to largely align with the broader Democratic agenda. Increased tax rates for corporations and high-income individuals would be used to fund social programs, infrastructure projects, and climate resilience efforts.

Harris’s economic strategy focuses on rebuilding the middle class through targeted financial relief and incentives. As a Senator, one of her key proposals was the LIFT the Middle-Class Act (Livable Incomes for Families Today), which aimed to provide a tax credit of up to $3,000 per person (or $6,000 per couple) for lower- and middle-income workers. This initiative sought to increase disposable income for millions of Americans, stimulating consumer spending and overall economic growth. Experts believe that such measures could offer substantial relief in today’s economic climate, where inflation and the cost of living have significantly impacted household budgets.

Many of the likely Harris proposals have been outlined by Biden and members of his administration, including the current Vice President. The President’s 2025 budget proposal outlines several of the most important priorities, including raising the corporate tax rate to 28% and targeting wealthy individuals with new taxes. This would include a 25% minimum tax on individuals with more than $100 million in net worth and a massive increase in the capital gains tax for households making more than $1 million per year. Regardless of which specific proposal would be able to come to fruition, the focus on implementing a wealth tax on individuals with significant assets is clear.

Harris would also continue tax credits for middle- and low-income families, as well as tax incentives for businesses investing in renewable energy and sustainable practices. All the proposals align with the general Democratic orientation towards using the tax code to reduce inequality and accelerate the transition to renewable energy.

The biggest question mark for Harris stems from previous tax policy ideas. How seriously she would pursue these policies given her new vantage point is unclear. These ideas include fully repealing the Tax Cuts and Jobs Act (Biden wanted to preserve the tax cuts for households making less than $400,000 per year), implementing a tax credit for rent payments, and implementing a financial services or banking tax.

Additionally, the Harris campaign is committed to addressing long-term economic challenges, such as job security amid advancing technologies like artificial intelligence. By offering social insurance mechanisms and tax relief to those earning below a certain threshold, Harris aims to create a safety net for workers whose jobs may be at risk due to technological advancements.

According to the Tax Foundation, the proposals outlined in the Biden-Harris 2025 budget alone “would reduce economic output by 1.6 percent and employment by 666,000 full-time jobs.” A more ambitious tax reform agenda by Harris could drag on economic growth even further. However, given the need for Harris to appeal to moderate states in the Rust Belt, the chances of her pursuing her more aggressive policies from the pre-COVID era seem remote.

President Donald Trump

On the other side of the aisle, President Donald Trump promises to continue his program of tax cuts that he prioritized during his presidency. Trump seeks a permanent extension of the Tax Cuts and Jobs Act, one of the signature pieces of legislation that he points to as evidence of his economic prowess. Permanently extending the legislation, which is due to expire at the end of 2025, would seal the corporate tax rate at 21%, among other changes.

Trump’s economic platform focuses on deregulation and reducing tax burdens on corporations and high-income earners. He argues that this approach would drive economic growth by boosting investments and expanding the private sector. Notably, Trump’s policies include the continuation and expansion of Opportunity Zones, which aim to spur economic development in underprivileged areas through tax incentives.

Targeted investment incentives for the private sector also falls under Trump’s tax plan umbrella. Opportunity Zones are one example. The program directs real estate investment toward marginalized neighborhoods by promising preferential tax treatment in return. The same type of targeted incentive approach could also be applied to spur industrial development as part of Trump’s commitment to bring more manufacturing jobs to America.

Trump has largely failed to elaborate on the specifics of his tax plan. But he frequently credits tax cuts for corporations and individuals as a major impetus for economic success during the first part of his term. Another clue toward potential Trump moves comes from Project 2025, a collection of conservative policy proposals released to inform a future Republican administration. In addition to advocating for more tax cuts, Project 2025 proposes a massive simplification of the tax code and a US withdrawal from global tax treaties pursued by the Biden Administration. These proposals suggest a continued emphasis on reducing the regulatory and tax burdens on businesses, positioning the U.S. as a competitive environment for investment.

There are additional potential areas Trump has mentioned but not provided additional clarity. First, the proposal to exempt all tips from federal tax. While it may appeal to many workers in the leisure and hospitality sector, the fact is that few tipped workers pay little to no taxes on these wages because the wages are low. The proposal could lead to gaming the system as companies and workers declare to be paid a tip instead of a wage or payment for service. Second, the proposal to eliminate the partial income taxation of Social Security benefits. As a reminder, these taxes help fund Social Security and Medicare Hospital Insurance trust funds. The cost of this tax cut would be massive. Here’s what the Committee for a Responsible Federal Budget estimates for the impact:

· Increase deficits by $1.6 trillion to $1.8 trillion through 2035

· Increase Social Security’s 75-year shortfall by 25 percent – or 0.9 percent of payroll

· Nearly triple the Medicare HI 75-year shortfall, increasing it by 0.6 percent of payroll

· Advance the insolvency date of Social Security’s retirement trust fund by over one year

· Advance the insolvency date of the Medicare HI trust fund by six years

Analysis and Key Takeaways

The expected nomination of Kamala Harris does not fundamentally alter the contrast between the two major party candidates for U.S. president. The divergence in tax policy proposals is driven by vastly differing world views and competing economic priorities. Harris’ newfound prominence in the race does little to alter these realities. Her candidacy highlights the ongoing debate within the Democratic Party between progressive ideals and centrist pragmatism, while Trump’s platform reinforces a consistent conservative economic agenda.

For investors assessing growth opportunities, it is critical to remember that each candidate would face some constraints in Congress. Neither Harris nor Trump will have unfettered control over tax policy. Nonetheless, the orientations and policy proposals they bring to the table paint very different pictures for manufacturing, healthcare, and financial services.

The LIFT Act, which Harris championed as a senator, represents a direct approach to addressing income inequality and providing immediate financial relief to middle- and lower-income families. Implementing a similar act in today’s economy could stimulate consumer spending, potentially driving economic growth. Additionally, Harris’s commitment to green energy incentives aligns with global sustainability trends and could foster growth in the renewable energy sectors. These initiatives are likely to attract significant support from progressive voters and environmental advocates, though they may face resistance from conservative constituencies concerned about the fiscal impact.

Start with the overall manufacturing climate. While both candidates share a deep desire to increase manufacturing jobs in the US, Trump’s policy playbook is more likely to create a favorable manufacturing investment environment through the tax code. His steadfast desire to hold corporate tax rates at 21%, plus the general Republican focus on deregulation, would benefit manufacturing and industrial companies by reducing operational costs and increasing capital for expansion.

Under a Harris presidency, the outlook for corporate taxation would be much cloudier. While additional fiscal stimulus could create new opportunities for the sector, and green energy tax incentives could help accelerate the adoption of renewable energy, the prospect of higher corporate tax rates would weigh on corporate decision-making. These question marks might also reduce the attractiveness of the US as an investment destination, even with the significant incentives for domestic manufacturing and infrastructure remaining in place. Many manufacturing firms will have already accounted for the possibility of a momentary lapse in tax breaks in their capital expenditure plans. But if Harris is truly intent on removing any trace of the Tax Cuts and Jobs Act from the tax code, the long-term calculus on manufacturing investment in the US may shift.

Healthcare is another sector that could experience disruption in the face of tax policy changes. If Harris stands by her former endorsement of Medicare-for-All, a wide swath of tax increases will be required to fund a nationalized healthcare system. Projections about the impact of a national, single-payer system vary widely. Some economists view the system as a net positive for economic growth, helping improve labor mobility and removing the economic burden of healthcare costs from middle- and low-income households. Others fear the savings on premiums and healthcare administration costs would be dwarfed by the size and scale of tax increases required to fully fund the system. During her previous campaign for president, Harris pledged not to increase taxes on households earning less than $100,000 per year. Yet massive revenue raisers would need to be found elsewhere, such as increases to capital gains or estate taxes. The implementation of Medicare-for-All would represent a significant transformation of the U.S. healthcare system, with wide-ranging implications for both the economy and the healthcare industry.

Finally, banking and financial services firms should brace for turbulence if Harris wins the seat in the Oval Office. As a US Senator, Harris often co-sponsored legislation with Elizabeth Warren (D-MA), Bernie Sanders (I-VT), and other major critics of the financial system. From raising the capital gains tax on wealthy individuals to implementing a banking tax targeting large financial institutions in particular, Harris could pursue a range of targeted measures. Her reputation as a headache for big banks runs all the way back to her time as Attorney General of California, when she sued JPMorgan Chase, Bank of America, and Citigroup for their actions surrounding the 2007-2008 financial crisis. Even with Harris’ more moderate outlook in 2024, financial services seem destined for additional scrutiny if Harris wins. These measures would likely face significant pushback from the financial industry, but they align with broader Democratic goals of financial regulation and consumer protection.

By contrast, a Donald Trump victory would likely supercharge capital markets anticipating more tax reductions. Deregulation and tax cuts would also boost the financial sector by increasing profitability and reducing compliance costs. This approach is expected to foster a more favorable environment for financial institutions, encouraging investment and growth in the sector. It would likely lead to an increase in short-term economic growth, especially with the reduction in regulations. But there is a price to pay.

Without offsets or payfors, these tax cuts would come at a heavy cost to the US fiscal situation accelerating budget deficits, debt and shortening the timeframe for when Social Security and Medicare trust funds run out. Rolling back environmental regulations will help with energy production and perhaps, permitting to increase power generation across state lines. Yet, they risk the negative impact on the environment in the short run and risk negative impact for dealing with CO2 in the long run.

Concluding Remarks

The contrasting tax policy positions of Kamala Harris and Donald Trump present different implications for businesses and industries. Harris’s approach focuses on increasing taxes to fund social programs and promote sustainability, potentially impacting profitability but fostering long-term growth in green sectors. Trump’s policies prioritize tax cuts and deregulation, aiming to stimulate immediate economic growth and investment. Financial analysts and investors should consider these differences when assessing potential economic growth opportunities. As the election unfolds, it is crucial for investors and business leaders to closely monitor these policy proposals to understand their potential impacts on various sectors and the broader economy.

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I'm Andy Busch

If things feel crazy in the world today, that's because they are. We are seeing huge shifts in risk and reward, leading to a lot of economic uncertainty and confusion about where we go from here.

As an economic futurist, I do things a bit differently than your typical economist — going beyond analyzing how today's financial policies impact economic growth, to focus on the super-charged trends driving much of today's global chaos and change.

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