As election-day approaches, financial people and market commentators will look closer at each candidate’s specific policy proposals. In this, as ever, matters can only be described as a mixed bag. Clinton’s implicit promise to continue Obama policies cuts two ways. On the plus side, Wall Street tends to prefer continuity and predictability, especially opposite the great disruption and uncertainties Donald Trump promises. Nonetheless, the continuity and relative stability offered by Clinton do contain a drawback. Because the economy has underperformed under Obama, Wall Street harbors a general wariness about the policies she would extend. Trump, though he promises uncertainty and disruption, has advanced many specific policies that would otherwise appeal to Wall Street.
This is the first of a two-part series to consider how the financial community might view some of the specifics offered up in campaign literature and speeches. Part two will take up spending, regulation, trade, and health care. This first discussion deals with the ever-complex and perennially important issue of taxes. On this front, Trump my well appeal more than Clinton. He stresses efficiencies, tax relief generally, and a simpler code, all perennial favorites with the financial community. She stresses equality and alludes to tax hikes, seldom popular in financial circles, for their impact on personal incomes and their presumed retarding effect on economic growth.
Trump’s primary appeal lies in his promise to cut corporate and individual income-tax rates across the board. He has also spoken of ending inheritance taxes, something welcome in an industry that deals with wealth transfers. Of particular appeal to Wall Street is Trump’s plan to reduce corporate tax rates by more than half from the present 35 percent to 15 percent. Equity markets, after all, rise and fall with prospects for after-tax profits. Trump has, however, promised one tax increase. He would end the ability of hedge fund managers to report income as carried interest and so enjoy a lower tax rate than people face on ordinary income. Though hedge fund managers clearly take a dim view of the prospect, most of the financial community is largely agnostic on this point.
On simplification, Trump has promised to reduce today’s seven income tax brackets to three, but is otherwise short on details. Of particular concern to financial people is Trump’s refusal so far to make clear whether a general corporate tax rate reduction would involve the elimination of certain tax breaks, such as oil depletion allowances and accelerated depreciation. Many industries would appear a lot less valuable if these breaks were taken off the books, even if done in concert with a general cut in corporate tax rates. Trump has opened the door to such considerations, suggesting that he would make up revenues lost to lower rates by closing “loopholes,” but questions of which ones and how leave an unsettled feeling on Wall Street.
Clinton is mute on corporate taxes. The implication is then that she would maintain the current, high 35 percent rate, highest in the developed world, in fact. She has also promised what she calls a “fair-share surcharge” on the wealthy should their disproportionate earnings from dividends and capital gains otherwise allow them to pay at lower-than-average tax rates. Though this proposal does little to threaten financial markets, it is not likely to gather much popularity in an industry dominated by investors. Her promise to impose an “exit tax” to stop companies from incorporating abroad, the so-called “inversions,” would affect only a few companies, but its tendency to interfere with efforts to maximize profits gets a sour response on Wall Street. Financial people would prefer to answer the inversions question by making the country’s tax regime less onerous generally, as Trump has promised.
Tax relief makes an appearance in some of her proposals but nothing of serious concern to the financial community. She would lift the burden of federal compliance on companies with five or fewer employees, but this means little to publically traded securities and in any case would further complicate the tax code. Wall Street would respond better to a more general reduction in compliance costs. Financial people could generate enthusiasm over Clinton’s promise to reward businesses that provide “good-paying jobs,” except that so far she has failed to say how she would identify them or reward them. As in the case of some of Trump’s promises, a lack of detail leaves too many questions for comfort.
In one area, Clinton’s campaign has provided financial people with a great dollop of relief, if not reason for positive enthusiasm. The Democratic Party platform, no doubt responding to Bernie Sanders, Elizabeth Warren, and others, endorses the idea of a tax on financial transactions of all kinds. Such a financial transactions tax (FTT), even if set at low rates, could severely interfere with all financial markets, equities, bonds, currencies, and derivatives, and on a number of levels. Accordingly, the party endorsement has worried Wall Street. The relief emerges from Clinton’s seeming refusal to pick up on this party position. The closest she has come is to talk about limitations on high frequency trading by promising a tax on cancelled trades. Such a proposal is hardly good for the financial community but has contained effects and is far less threatening than the party’s call for a broad-based FTT.
On taxes, then, it seems reasonable to conclude that Wall Street would prefer Trump, apart from his generally disruptive approach. But taxes, important as they are, remain only a part of the picture. My next discussion will take up the candidates’ proposals on spending, regulation, trade, and health care. In many of these, Clinton would seem to have an edge. In these other areas, too, each candidate offers considerable cause for financial fear.
Thirty Tomorrows 