No one but diehard Donald Trump fans believes a word he says anymore. So when he banged on this week about the economic hellscape that a Joe Biden presidency would inflict on America, the performance smelled of desperation, not anything to do with reality.
Mr. Trump, who is trailing in the polls by about 10 percentage points, on Wednesday said, “Simply put, it’s a choice between a socialist nightmare and the American dream,” adding that Mr. Biden’s agenda would trigger a “steep depression” and that the Democratic leader would legislate “the highest business tax rate in the developed world.”
He wants Americans to believe the he, and only he, can fire up the postpandemic wealth-creation machine.
To be fair to Mr. Trump, he did have a good economic run before COVID-19 rudely interrupted his party. The lockdowns pushed real GDP down by 9 per cent in the second quarter over the previous quarter. Measured by market performance, he’s still on top. The S&P 500 sank like a cement life jacket in late February and early March, then shot back to the surface. The index is up 54 per cent since the day he took office on Jan. 20, 2017, driven mostly by the awesome tech rally.
Of course, Mr. Trump would rather not talk about the wholesale destruction in the job markets seen since the start of the pandemic and the soaring poverty rates. His message is that, under a Biden presidency, the ugly stuff will get uglier and the pretty stuff will not happen.
Would a Biden presidency really damage the economy and the markets?
The core of Mr. Trump’s argument is that Mr. Biden, possibly backed by Democratic control of both the House of Representatives and the Senate – the Blue Wave – would jack up personal taxes paid by the wealthy and corporate taxes. He’s right. Mr. Biden would raise taxes on incomes above US$400,000 to 39.6 per cent from 37 per cent. An increase that small does not make him a raving socialist.
While there is no doubt that Mr. Trump’s Tax Cuts and Jobs Act of 2017 bestowed lavish benefits on the rich, they were not as quite as lavish as you might think. The reason: The legislation introduced a US$10,000 cap on the deduction for state and local tax, known as the SALT deduction. The Democrats have vowed to lift the SALT cap if they take the Senate in November, meaning after-tax incomes would go up.
But the Democrats' plan would benefit the rich far more than anyone else, making it an out-of-character policy for the party to endorse. According to the New York Times, almost 60 per cent of the benefit of removing the SALT cap would go to the top 1 per cent of households. For the top 0.1 per cent, the average tax cut would be US$145,000 a year. Overall, 75 per cent of the benefit would go to households in the top fifth of income distribution.
America’s wealthy probably have already figured out that ending the SALT cap would help them, making it easier to vote for Mr. Biden. On balance, the wealthy support the Democrats. Montreal’s BCA Research noted that households earning more than US$150,000 a year favoured Democrats by 20 percentage points in the 2018 congressional elections, when the Democrats took the House.
There is some chance that the savings would free up investment funds, so let’s say the end of the SALT cap would be marginally bullish for the markets.
The more dramatic move would come on the corporate side, where the income tax rate would go to 28 per cent from 21 per cent. But the former figure is still well less than the 35 per cent that prevailed until 2017, and the U.S. tax code is so riddled with loopholes that few companies paid the top 35 per cent and few will pay the 28 per cent rate if Mr. Biden takes the White House.
Still, corporate taxes would go up somewhat. BCA calculated that the tax hike would reduce S&P 500 earnings by 9 per cent to 10 per cent. That would definitely be a downer for the markets, but they might be offset by the other promises in the Democratic platform.
The biggie is a pandemic-relief fiscal stimulus package that would be worth as much as US$3.5-trillion. Mr. Biden has also called for additional spending worth about 3 per cent of GDP for infrastructure, health care, education, climate and housing. The Democrats have a fairly ambitious climate plan, and would rejoin the Paris Agreement that was spurned by Mr. Trump. The climate effort could trigger a surge in spending on renewable energy. Mr. Trump’s focus on hydrocarbons produced no jobs whatsoever.
Then there’s China. There is no doubt that America’s trade relationship with China would improve somewhat under a Biden presidency; it couldn’t get any worse than it is now.
Voters of both the wealthy and unwealthy variety are clearly not buying Mr. Trump’s message that a Biden victory would propel the United States into the house of economic and investment pain. He is losing the argument that only he can be the economy’s postpandemic savour.