Deficits, Taxes and Trade: A Presidential Policy Breakdown

With less than two weeks until election day, the race between US presidential candidates Kamala Harris and Donald Trump remains too close to call. This election year has already seen its fair share of political surprises and shakeups, and markets are bracing for more. At Loomis Sayles, we are not political pundits but we do follow elections closely, particularly the candidates’ policy agendas.

The candidates’ proposed policy agendas are evolving and, in some cases, light on detail. We like to focus on the agenda items that are likely to have the greatest potential economic or market impact: the deficit, fiscal policy, taxes, trade and immigration. You might be surprised to learn the candidates have many similar stances on these issues. Ultimately, the overall success of either candidate’s agenda largely depends on Congress (and which party controls it). Here’s what we know.

• The Deficit: Each candidate has plans to maintain deficit spending in the 6% to 8.5% of GDP range. Deficits at these levels used to be reserved for deep recessions. Both candidates are throwing off the previously conservative shackles of perceived budget constraints. Concerns about the size of the federal budget deficit are likely to continue regardless of who wins. And a continued rise in the relative size of the federal debt risks upward pressure on interest rates and inflation, and potential ratings downgrades on US Treasury securities.
  
  
• Fiscal Issues: Each candidate wants to use fiscal policy aggressively to promote social objectives but has very different ideas about how to do it. Trump wants lower corporate taxes to boost domestic investment, particularly in manufacturing, with a dose of steep tariffs to protect manufacturing from import competition. Harris wants higher taxes on corporations and capital income to provide funds for lower-income households with a mix of tax cuts and health, child, education and housing-oriented social spending. Harris, like President Biden, aims to support domestic manufacturing with large subsidies, with a dose of trade restrictions centered on China. The subsidies would be particularly large for computer chips, “green energy,” and electric vehicles. Either way, there would be a boost to the budget deficit. A need to boost military spending may also factor into the next administration in view of the current geopolitical climate.
  
  
• Taxes: Major reforms passed in the Tax Cuts and Jobs Act of 2017 are set to expire at the end of 2025, as well as further phase-out of corporate tax cuts, setting the country up for a “fiscal cliff,” that is, a severe fiscal contraction that could damage the economy. Both candidates want to extend much or all of the 2017 tax cuts, and both have made extensive proposals for further, but very different, tax cuts. The Trump agenda wants to renew all of the 2017 tax cuts on incomes and companies across the board, with additional tax cuts for good measure. The Harris agenda wants to raise taxes on high-income earners and companies but extend the 2017 tax cuts for the middle class. We expect the impending fiscal cliff to dominate government debate in 2025, and we don’t think markets will react favorably if tax legislation gets dragged out to the last minute due to political brinksmanship. Complicating the tax and budget debate will be the need to raise the federal debt ceiling before mid-2025.
  
  
• Trade: Both candidates are in favor of some form of trade protections, especially in regard to China. Trump has proposed aggressive tariff hikes on China, which he could probably accomplish with executive orders. But Trump’s proposal for a tariff hike on all imports from all countries would likely require Congressional assent. Both candidates favor tough restrictions on investment to and from China. Both candidates favor “reshoring,” which consists of moving the manufacturing supply chain back to the US, although they would use different tools to accomplish that. In addition, Trump wants to renegotiate the free trade agreement with Mexico and Canada (the USMCA), aiming to prevent Chinese companies producing in Mexico from having tariff-free access to the US market. Trump is a trade hawk and plans to use tariffs as the biggest revenue generator to offset his proposed tax cuts. Harris plans to use tax increases on corporations and high-income households as the main revenue generator to offset her proposed tax cuts and spending programs.
  
  
• Immigration: Both candidates want immigration reform and tougher border restrictions. Net migration into the US has decreased substantially in the last year and Harris plans to retain recent policy shifts. Trump is proposing increased strict border controls and deportations.

Control of Congress is critical

It’s not just the presidency that’s up for grabs—so is control of Congress. Every seat in the House and one third of the Senate seats are up for election. The overall success (or lack thereof) of either presidential candidate’s policy agenda largely depends on control of Congress. We think the odds of a divided government—when one party controls the White House, while another party controls one or both houses of Congress—are close to even. A divided government would likely produce fewer tax cuts, fewer spending increases and a smaller (but still large) budget deficit.

We’re likely in for more surprises and volatility in the weeks/months ahead. But regardless of the election outcome, it will take months for any meaningful new legislation to play out. Markets tend to react to the news of the day; we’ll continue to follow our process and stay focused on the credit cycle.

Information contained herein is derived from a variety of sources including the Harris campaign website, the Trump campaign website, the Wall Street Journal, ISI, Piper Sandler, the Tax Foundation, the Penn Wharton Budget Model and the Committee for a Responsible Federal Budget. We consider these to be reliable; we do not, however, guarantee their accuracy. Actual outcomes may differ materially from any forward looking statements made.

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