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With less than a month remaining before the US election, we want to give you a primer on the differences in Trump’s vs. Biden’s policies and how these can impact the market.
Tax policy
Biden and Trump have differing tax plans if they get elected. When compared to current policy, Biden will increase taxes (for the rich and corporations), while Trump wants to further cut taxes. See Figure 1.
Biden’s tax policy: save middle class America
Biden wants to ease the economic burden of the working class. He plans to:
- Raise tax rates on rich households (Americans making > US $400,000)
- Raise US corporate tax rate from 21% to 28%. This proposal would reduce corporate profits by US $130 billion each year
The additional tax revenue will be used to increase spending on green energy, healthcare and infrastructure, and to provide tax-relief for lower and middle income taxpayers.
Trump’s tax policy: more cuts
Trump wants tax cuts, plain and simple. During his first term, he signed the Tax Cuts and Jobs Act which lowered corporate tax rate from 35% to 21%. He believes that the tax cuts will lower unemployment rates. If reelected, Trump wants to lower the rate further, to 20% (he has not rolled out a formal plan for this however).
Fiscal spending
Biden’s fiscal spending plans
With the increased revenue from the tax increase, Biden plans to spend roughly US $3.2 trillion over the next decade; he plans to spend US $750 billion to improve healthcare and US $750 billion to improve education.
The bulk of his spending is on fighting climate change (US $1.7 trillion). Since mid-August this year, hundreds of wildfires have engulfed the West Coast. In less than a week, these massive wildfires have burned through over a million acres of land (that’s more than two-and-a-half times the size of Delhi). As America continues to grapple with this environmental crisis, climate change takes center stage in the U.S. presidential campaign.
The US $1.7 trillion will be spent to achieve net zero emissions by 2050. Biden plans to do this by:
- Modernizing infrastructure: This includes introducing zero-emission public transportation systems and a network of public charging stations for EVs.
- Accelerate public adoption of electric vehicles: This includes subsidizing consumers who switch to electric vehicles, providing incentives to trade in gasoline powered cars.
- Boosting renewable power: This includes subsidizing R&D into technologies such as large-scale battery power storage, carbon capture and minimization and more wind power sources.
Increased government spending is important to accelerate the US’ economic recovery. The US economy is largely supported by spending; specifically, the spending of consumers, businesses and the government. Under these proposals, Biden plans on spending big money, which will have a significant trickle-down effect into the aforementioned sectors.
Trump’s fiscal spending plan
Trump has no plan to combat climate change, as he simply does not believe in climate change. During his current administration, he has reversed at least 100 environmental regulations. He has been a proponent for fossil fuels, approving dozens of major fossil fuel, energy and water projects during the pandemic.
Trump’s spending plan is focused on a transportation (bridge, waterways, roads) infrastructure plan costing US $1 trillion over the decade. To pay for this, he plans to cut government spending on defense, healthcare, education and social welfare programs.
Trump also has ambitious plans to resuscitate the oil industry in the US. This involves expanding drilling for oil and gas on federal lands and offshore, including the Alaska National Wildlife Refuge. Unfortunately, the decline in oil prices is due to the abundance of supply – increasing supply will not help the sector rebound faster.
Policy towards China
No matter who becomes the president, it’s unlikely that US policy towards China will change. Tough policy against China is the one issue that receives bipartisan support. China is seen as a strategic competitor by the United States.
Biden’s Trade Policy Plans
Although he has accused China of unfair trading practices and intellectual property theft in the past, Biden is committed to diplomacy by rethinking the use of tariffs to confront China. However, similar to the current administration, Biden wants to reduce America’s dependence on Chinese manufacturing of critical goods and maintain competitiveness with China on artificial intelligence and next generation 5G wireless networks.
This means, in the short term, the current policy will likely be held.
Trump’s Trade Policy Plans
Trump has a confrontational China policy. In February 2020, Trump implemented the “Phase One Trade Agreement†that introduced new US tariffs (six times higher than before the 2018 trade war) on imports from China. A second-term with Trump is bound to rely heavily on tariffs. After all, this was the weapon Trump used to apply pressure towards China, Mexico and other nations to America’s will — even calling tariffs “the greatest negotiating tool in the history of our country.â€
Trump’s plan is also to lure one million manufacturing jobs from China to the U.S. by offering tax credits to American companies. He plans to offer more generous incentives to companies in the pharmaceutical and robotics industries.
While the US-China trade war has certainly introduced new challenges, it has also created many unique opportunities. Many US investors are looking to move production to alternative countries, including Vietnam, India and Thailand.
The likely future outcome
Whoever wins the election in a few weeks will inherit an economy in the throes of an unprecedented global recession. Either version of the US government will be attempting to stimulate the US economy by committing to major fiscal spending. On this front, Biden’s plan is more diverse and expansive.
- In the first half of 2021, if Biden wins, his immediate action plan will likely be to push for government spending, and hopefully, return to normalcy.
- Both JP Morgan and Goldman Sachs believe that a return to normalcy would favor European cyclicals, value, China-exposed stocks and renewables.
The combination of the fiscal stimulus with the Fed’s commitment to keep interest rates low until the economy is at full employment and inflation is consistently above 2% will likely inflate the economy and the stock market. Here are macroeconomic predictions from Moody’s (Figure 2). A Biden win, and the Democrats retaking the senate and maintaining control of the house is projected to result in the strongest economic growth.
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