Five Days To Go

It’s Thursday, October 31.

Happy Halloween!

If today isn’t already scary enough, the 2024 election is looming over us wherever we turn.

Obviously, I have my opinions on what the country needs. But the following analysis is meant to simply list where the two main presidential candidates stand on economic positions.

Or at least where they say they stand. Politicians say a lot on the campaign trail… only to conveniently forget about it once elected. Or, despite their best efforts, they find themselves unable to follow through.

Yet since their actions and inactions will affect our investments, it’s best to pay attention to what they say. And when it comes to the economy, both Donald Trump and Kamala Harris have said quite a bit.

The “Trump Tax Cuts”

One of the biggest tax topics of this election cycle is the 2017 Tax Cuts and Jobs Act (“TCJA”). Passed under President Trump’s first term, much of it is set to expire in the next year or so unless renewed.

The largest tax code overhaul in decades, it reduced five of the seven individual income tax brackets. The top rate fell from 39.6% to 37%, though the next level remained unchanged. The third fell from 33% to 32%, the fourth from 28% to 24%, the fifth from 25% to 22%, and the sixth from 15% to 12%, while the lowest stayed at 10%.

To quote a recent San Francisco Chronicle summary:

Who got the biggest benefit depends on how you look at it, and is the subject of much political rhetoric. Wealthy individuals, who pay the most taxes, got the biggest tax cuts dollarwise. Middle- and lower-income groups, who pay less in taxes, got the biggest tax cuts in percentage terms.

It also:

• Raised the standard deduction

• Suspended the personal exemption of $4,150

• Raised the child tax credit for married couples making $400,000 or less

• Raised the estate tax exemption

Along with every other Congressional Democrat, Kamala Harris did not approve of the TCJA. There were multiple reasons they gave at the time:

• It was a tax cut for the rich.

• It would result in lowered income for the federal government.

• The benefits varied state by state.

But more important than individual tax rates – at least from an investing point of view – was the impact the law had on corporate taxes.

Suddenly, many companies found themselves sitting on a pile of cash they hadn’t expected. And while many reinvested that money into their business, many executives deployed that capital in another way. They rewarded shareholders.

In 2018, S&P 500 Index companies bought back $840 billion worth of stock. That was up from “only” $540 billion the prior year. 2019, while below the 2018 figures, was still an impressive $749 billion. This is one of the reasons why markets were so buoyant for both years.

Not surprisingly, neither candidate has changed his or her opinion on this legislation. If re-elected, Trump would urge Congress to renew everything set to expire. And if Harris wins, she’s pledged to extend individual tax cuts for those making under $400,000 a year.

However…

She wants to raise the long-term capital gains tax rate from 20% to 28% for those who earn $1 million or more. Plus, she would see the corporate tax rate increase from 21% to 28%. Trump, meanwhile, wants to lower the latter even further to 20%.

Vote for whoever you want, but I’ll just say this: Taxing an activity is a good way to disincentivize that activity.

If reducing corporate taxes incentivized buybacks and special dividends, then increasing them would disincentivize shareholder payouts. That isn’t to say you can’t do it, but there will be consequences for the market.

Trump and Harris on Everything Else in the Economy

It seemed a very big deal a few months ago when first Trump and then Harris pledged to eliminate federal income taxes on tips. Since then, we’ve learned the details of their individual plans, with:

• Harris saying she’ll keep tips subject to payroll taxes, working with Congress to prevent fraud and implement reasonable income limits to the policy.

• Trump indicating he wants to remove payroll taxes from tippees’ obligations as well, along with stripping federal tax mandates from Social Security and Medicare payouts.

On the topic of Medicare, meanwhile, Harris has proposed paying for home health aides for people in more challenged income brackets. The program would also pay for such things as hearing aids, eye exams, glasses, and contact lenses.

She’s also indicated her disapproval of families paying more than 7% of their income toward childcare. And Harris famously declared in August that she wants to give first-time homebuyers up to $25,000 toward down payments.

I have my own thoughts on that last one, which I shared in our latest issue of The Wide Moat Letter. Suffice it to say that subsidizing demand in an already tight housing market is a pretty good way to increase, not decrease, housing prices.

Trump, for his part, has fully embraced running mate J.D. Vance’s position of giving higher tax credits to parents. Instead of the current $2,000 per child, he would raise it to $5,000. Similarly, he would push for tax credits for people who take care of sick relatives at home.

Trump says he would temporarily cap credit-card interest rates at around 10% – a significant decrease from today’s 20%-plus. And he believes in making car loan interest fully tax deductible.

That’s a lot to take in – though hardly a full listing of either candidate’s positions, proposals, and promises. But I do think there’s one final economic issue investors need to remember.

That would be tariffs.

About Those Tariffs

Trump, of course, was famous (or infamous) for implanting such trade decisions. And Kamala Harris’ circle was famous for criticizing them.

What’s ironic is that Biden went on to keep most of what his predecessor implemented and added a few of his own. Harris has come out against Trump’s newest proposals for implementing tariffs of 10% to 20% on every import coming into the U.S., at least.

When it comes to China, those would be raised to 60%… with the possibility of 100% to 200% added onto cars made in Mexico.

Trump believes this will boost American manufacturing. Harris believes this will skyrocket costs for American consumers.

You already know what I believe. Tariffs, when used surgically, can be an effective tool for correcting unfair trade practices. Targeting China’s electric vehicle industry – which is highly subsidized and undercuts U.S. manufacturers – is one example. Industries where intellectual property theft is rampant are another.

Regardless of who wins the election, here’s the larger point I would make…

Here at Wide Moat Research, we believe that there are two primary drivers of long-term total returns when investing in common stocks.

The first, and arguably the most important, is the rate of change of earnings growth that the company generates.

Generally speaking, the faster a business grows its earnings and cash flows, the greater the long-term returns it will generate over the long run.

The other primary source is the valuation you pay to purchase a company’s earnings growth. Too high of a valuation will cause you to earn less than the company’s growth warrants, while a low valuation will cause you to earn more than the company’s growth warrants.

While most investors are fixated on the next president, we will remain diligent in researching and analyzing the best companies that will generate optimal results based on these two primary drivers.

And keep in mind, just like your vote in this upcoming election, as a shareholder in a public company, you also have a vote in which you can decide whether or not you want to own a stake in some of the greatest wealth builders in America.

May the best candidate win!

Truly.

Regards,

Brad Thomas
Editor, Wide Moat Daily