Aberdeen’s Paul Atkinson considers the impact of the US presidential election
Paul Atkinson, head of North American Equities at Aberdeen Asset Management, says investors face uncertainties because of the fact none of the contenders for president in the US have actually provided much by way of policy objectives.
Amid a tepid economic recovery and uncertain jobs outlook, Americans will go to the polls on 6 November to elect a new president or re-elect the incumbent, one-third of the US Senate, and all 435 members of the House of Representatives (the House).
As things stand now, there are many policy questions that are unlikely to be answered until the next presidential term begins. So what does this mean for investors? Which segments of the economy are likely to feel the greatest impact of changes that may be on the post-election horizon?
We believe that, as has been the case for the last year, fiscal policy will be the greatest source of contention and uncertainty as the election nears. The looming “fiscal cliff”-roughly US$650 billion of expiring tax cuts, automatic spending reductions and other fiscal tightening measures-will remain the central concern through 2013, when talks about another increase in the debt ceiling are expected to resume. Against this backdrop, we expect a great deal of attention will be focused on the issue and, ultimately, that some level of fiscal restraint will be enacted. However, the eventual structure and magnitude of any moderations depend heavily on the outcome of the presidential and Congressional elections. In the following discussion, we outline three topics that will be in the spotlight as we move towards the election and analyse the possible outcomes with a continuation of-or a change in the administration.
Federal tax rates
At the heart of the “fiscal cliff” debate are the George W. Bush-era income tax cuts, payroll tax cuts, extended unemployment benefits and alternative minimum tax (AMT), which collectively account for more than half of the amount in contention.
Party ideologies diverge on the issue of the Bush tax cuts as Republicans are likely to extend the reductions for all consumers, whereas Democrats are more likely to extend the cuts for all but those in the highest marginal income tax brackets. It is largely understood that a complete lapse in income tax cuts and, subsequently, the
economy at large will have a negative impact, as consumer spending comprises 70% of GDP. Therefore, we feel that such an extreme event is unlikely to take place.
Another important issue likely to be part of the conversation is corporate taxation. Specific considerations include closing tax loopholes for major corporations, tax breaks for small businesses, and a potential “tax holiday” which would allow companies to repatriate overseas cash at a lower tax rate in an effort to stimulate corporate spending in the US.
Generally speaking, the Republicans are aiming to simplify the tax code, while Democrats are targeting selective reforms to balance the tax burden between corporations and individuals, with the goal of benefiting the American “middle class,” a constituency which has been at the center of the tax reform debate. Candidates from both sides of the political aisle have been seeking the support of the middle class, for whom they have somewhat divergent income classifications. The Republicans have touted to middle-income families the benefits of lower tax rates for corporations, which they note would encourage companies to expand their businesses in the US, ultimately creating new jobs. The Democrats favour reducing the corporate tax rate while simultaneously eliminating some deductions, which they believe will reduce the fiscal deficit without increasing taxes on the middle class.
Dividends and long-term capital gains are currently taxed at maximum rates of 15%, compared to the highest income tax bracket of 35%. Republicans favour maintaining the relatively lower rates, while their Democratic counterparts support taxing all dividends and capital gains as ordinary income, which they view as “levelling the playing field” between middle- and higher-income taxpayers.