Good Monday AM from your Hometown lender,
The bond market is closed today for Indigenous Peoples Day (formally Columbus Day).
The equity markets are open and seem to doing well. All indices are closing on in new highs. The election is three weeks and one day away and with no real market moving insight today, lets touch on how the election could impact markets.. The articles I am reading indicate that a Republican White House win helps equities more and hurts bonds/rates more. A Democrat win likely sees more muted gains in equities and better rates for bonds. This is all though under the expectation that the leadership in congress follows suit. If either party runs the table, then I think all markets get nervous. Tax and spend wont help bonds/rates nor will protectionist policies. Moderation is the best economic path forward. The WSJ did a pretty good analysis The Election and Your Taxes: Three Outcomes That Would Shape Tax Policy After November – WSJ. I am including it below.
Taxes could go up, down or completely sideways next year, depending on which political party controls which parts of the government after the too-close-to-call November elections.
With the House, Senate and White House all in play, trillions of dollars ride on a few hotly contested seats. Lawmakers, analysts and investors are busily gaming out scenarios, trying to understand how the next Congress might handle expiring tax cuts and other fiscal debates.
A Republican sweep led by Donald Trump could yield a fresh round of tax reductions. Full Democratic control with Kamala Harris in the White House—less likely given the current trajectory of Senate races—could spur higher taxes on corporations and wealthy households. Divided government—a president from one party and Congress at least partially controlled by the other—could cause a deadline-breaching showdown in December 2025 or a rare bipartisan agreement.
Nothing forces Congress to change tax laws, but the consequences of inaction are real. If Congress does nothing, many tax cuts Republicans enacted in 2017 expire after 2025, raising taxes on 62% of households in 2026.
“There is going to be a tax bill next year, no matter who’s in the White House, no matter who’s controlling the House and the Senate,” said Brad Close, president of the National Federation of Independent Business. “What shape it’s going to take, when it’s going to come up, how big, how small? No idea.”
Let’s examine a few scenarios.
1. Republican sweep: ‘Choose your own adventure’
This might seem straightforward. Republicans created the 2017 tax cuts and credit them for the strong economy in 2018 and 2019, so they will keep them. They are keen on extending the lower tax rates and larger standard deduction for households. And they are particularly eager to keep a 20% deduction for certain closely held businesses.
But Republicans’ intraparty disputes and congressional rules will constrain them, especially with narrow majorities.
“This is the one where the distribution of outcomes is widest,” said Michael Pugliese, a senior economist at Wells Fargo. “It feels a little bit like a ‘choose your own adventure’ in terms of what it would look like.”
They might struggle on the first step: setting a budget target for how much their bill would add to deficits over a decade. Sen. Mike Crapo (R., Idaho), the likely Finance Committee chairman if Republicans win, argues that tax-cut extensions don’t need to be offset with other provisions. But that view isn’t universal, and some Republicans might be concerned enough about adding $4 trillion or more to budget deficits to resist that position.
Beyond extending the 2017 law, Republicans would consider incorporating tax-cut ideas floated by Trump during his presidential campaign. That includes removing taxes on tips and overtime pay, allowing deductions for car-loan interest and creating a special tax rate for U.S. manufacturers.
(Procedural constraints would likely prevent Republicans from following through on Trump’s call to stop taxing Social Security benefits.) GOP lawmakers are monitoring Trump’s ideas and say they will determine later what to include.
A narrow House majority could give Republican lawmakers from New York, New Jersey and California leverage to increase the $10,000 cap on state and local tax deductions, a further tax cut that would make Republicans’ arithmetic harder. Congressional procedures allowing one-party tax votes typically don’t permit widening deficits beyond the 10-year budget window; they could, again, extend tax cuts temporarily or just make some pieces permanent.
Any “non-pro-growth” policies should be paid for, said Sen. Thom Tillis (R., N.C.)
“We’re going to have to do car washes, bake sales, find the parts of the American Rescue Plan and the Inflation Reduction Act that are sources for pay-fors,” said Tillis, referencing clawing back money from some of Democrats’ laws from 2021 and 2022.
Theoretically, Trump’s proposed across-the-board tariffs on imports could offset lost revenue from tax cuts. But Trump might just impose those tariffs without Congress. Lawmakers could point to the revenue without it counting legislatively.
A narrow Senate majority would empower moderate members such as Susan Collins (R., Maine) and Lisa Murkowski (R., Alaska). Senators up for re-election in 2026, such as Collins, Tillis and Bill Cassidy (R., La.) would also have sway.
“All you need are any two or three members to completely put a kink in the slinky,” Tillis said.
2. Democratic sweep: Helping families, taxing wealthy
Democrats generally want to extend expiring tax cuts for households earning under $400,000, with Harris adopting President Biden’s pledge to protect people below that threshold. Beyond that level, because many Democrats represent high-income areas, there will be pressure to push that $400,000 level upward—protecting more constituents but reducing federal revenue.
“I’m not mad at anybody for creating wealth,” Harris said on “The Late Show With Stephen Colbert” on CBS. “But we need to make sure that everyone is paying their fair share” in order to fund policies such as child tax credits, she said.
The $10,000 state and local deduction cap divides Democrats. Progressives say it should remain to raise money from high-income households. But if Democrats sweep, New Yorkers Hakeem Jeffries and Chuck Schumer would run the House and Senate, respectively, making it more likely that the cap would increase or vanish. As a senator, Harris co-sponsored a bill to repeal the cap, but she hasn’t taken a position as a presidential candidate.
Former President Donald Trump has proposed tax cuts on top of extending the 2017 tax law, while Vice President Kamala Harris is trying to raise taxes on high-income households. WSJ’s Richard Rubin breaks down the candidates’ tax plans.
Harris would seek an expanded child tax credit, based on the more generous version that existed in 2021. That was $3,000 for most children and $3,600 for young children, and it was fully refundable to households that don’t pay income taxes. Harris would bump the credit to $6,000 for children in their first year. Many lawmakers will have their own priorities.
“Once there’s a tax title moving then everybody wants to throw their thing at the wall and see if it sticks,” said Mary Burke Baker, who leads the tax-policy practice at law firm K&L Gates. “There is going to be a lot of competition for whatever gets into this tax bill.”
Democrats could struggle to agree on a fiscal target.
The Biden administration has said all tax-cut extensions should be paid for—and that letting tax cuts expire doesn’t count as generating money. That stance could require more than $2 trillion in tax increases to extend tax cuts permanently, though less would be needed for temporary extensions. Asked whether Harris takes that view, spokesman James Singer said she is committed to preventing tax increases on incomes below $400,000 and pointed to independent analyses showing Trump’s plans creating larger deficits.
Even with narrow majorities, Democrats could likely agree on some tax increases, because they would no longer be blocked by exiting Sens. Kyrsten Sinema and Joe Manchin, who limited the party’s revenue-raising policies in 2021 and 2022. Still, razor-thin Senate control in this scenario—Democrats are unlikely to hold more than 50 seats—could complicate matters.
Democrats would work down the list of what is most politically feasible, probably starting with a higher corporate tax rate and tax increases on U.S. companies’ foreign profits. Tax increases on individuals—beyond just letting Trump-era tax cuts expire—could be tougher.
The party’s most novel idea, a billionaire minimum tax that taxes unrealized capital gains, seems unlikely.
Oregon Democratic Sen. Ron Wyden’s bill for such a tax has 19 co-sponsors, but lawmakers such as Sens. Mark Warner (D., Va.) and Michael Bennet (D., Colo.) would control the pivotal votes.
Bennet said he is more focused on shrinking the gap between tax rates on ordinary income and capital gains. And Warner, up for re-election in 2026, said he has concerns about the ideas out there so far and is hearing concerns from the business world.
3. Divided government: Pileup or off-ramp
Split control of government—a very likely possibility—could bring the messiest scenarios, if lawmakers take firm positions as the Dec. 31 deadline for expiring taxes approaches. It also has the easiest off-ramp, one Congress used in 2010 and 2013 to extend tax cuts.
If Harris embraces the Biden stance—all extensions of tax cuts should be paid for—that would prompt a showdown.
Progressives say that is the best way to break a decadeslong cycle that steadily reduced taxes. They argue that Democrats should push Republicans into a position where they are seen as holding middle-class tax cuts hostage because they want to cut taxes for rich people. Republicans would counter by pointing to economic consequences of paychecks shrinking in early 2026.
“Failure is an option, sometimes, not because you want it to be but because you can’t get a deal,” said John Gimigliano, who who analyzes tax legislation for accounting firm KPMG.
But there is an off-ramp.
In 2010 and 2012, Congress also debated expiring tax cuts. A 2010 bipartisan deal extended cuts for two years without paying for them. Then, in early 2013, Congress made most tax cuts permanent—and let rates rise for the top sliver of households.
A version of that deal could get repeated, said Rohit Kumar of accounting firm PwC, who negotiated the agreement for Senate Republicans. A divided-government scenario, he said, is the most likely arrangement to increase budget deficits because Senate Republicans say tax-cut extensions shouldn’t be paid for and a Harris administration would be focused on getting child-tax-credit expansions in a deal.
But it isn’t 2013 and larger underlying budget deficits may constrain lawmakers’ willingness to borrow more. Macroeconomic conditions are likely to be stronger than during the recovery from the financial crisis. That could embolden brinkmanship because the economy could withstand a temporary hit.
Also, these extensions aren’t just tax cuts. Moving pieces such as the $10,000 cap and international tax law create a much more complex negotiation.
Stay safe and make today great!!!
