The U.S. Election and Tax Policy

Our U.S. Public Policy and Valuation, Accounting & Tax strategists assess the possible scenarios in the upcoming elections, and what they could mean for both taxpayers and the market.

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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US public policy strategist.

Todd Castagno: And I'm Todd Costagno, Head of Global Valuation, Accounting, and Tax Research at Morgan Stanley.

Ariana Salvatore: With less than a week to go until the US election, the race is still neck and neck. Today, we dig into a key issue voters care about: Taxes.

Todd Castagno: It's Tuesday, October 29th at 10am in New York.

So, Ariana. Taxes are an issue that impact both businesses and individuals. It's a key component of both candidates plans and proposals. How have they evolved over the campaign?

Ariana Salvatore: I'd say in general we do tend to see a lot of overlap between Harris' proposals and the ones that the Democrats were campaigning on before she took over the mantle from President Biden in July. That being said, in some instances, her plans go beyond what was requested in the president's fiscal year [20]25 budget request.

For example, that $6,000 credit for newborns and the $25,000 homebuyer tax credit. These are areas where we've seen her campaign go beyond the scope of what Biden was campaigning on while he was still in the race. Of course, it's important to remember that any of these proposals would have to pass muster in a Democrat controlled or a split Congress – meaning that there will be some tempering of these plans at the margin.

Todd Castagno: So former President Trump campaigned in his first election on tax policy. He's campaigning on tax policy in his current campaign. What are his plans and views?

Ariana Salvatore: We've been talking about the Republican sweep outcome as the most deficit expansionary from tax policy changes because Republicans understandably have more fealty to the 2017 Tax Cuts and Jobs Act.

That law is set to expire by the end of next year. So, in a Trump win scenario plus Republican Congress, we think you can get most of that 2017 law extended. While in a Trump win scenario with divided government, it's probably a little bit narrower. In general, as I said, deficits skew larger in Republican win outcomes for that reason, with an asymmetry across the other election scenarios. That being said, we do still expect to see deficit expansion in 2026, regardless of who's in power, because these tax cuts will be extended one way or another.

But Todd, you've done a lot of work in this area and there are some substantial impacts from a potential corporate rate increase to think through. Can you give us a little bit of detail on what that kind of increase would mean for stocks and bonds?

Todd Castagno: Yeah. So, investors have been very focused on the rate and where it matters and where it does not matter. So, if you really think about it, most companies that are exposed to a rate increase or decrease are domestic oriented, consumer companies, retail companies, you know, hospital facilities, industrials; those are the most exposed to a rate increase.

Multinationals this time around are less exposed. So, if we go back to 2017, we think about it; that was a different story. We had $2 trillion of trapped cash on the sidelines that did come back – buybacks, dividends, corporate hiring. You know, this time around, that's a different story. So there is exposure but it's mainly consumer-oriented companies.

Ariana Salvatore: That makes sense. And you mentioned the 2017 almost as a blueprint for what we saw last time. You mentioned dividends and buybacks.

Do you have any sense of how this time around could