During the US presidential election cycle, tax policy has always been one of the core issues, and there have been significant differences between the two parties on the focus of tax policy. Democratic candidate Harris advocates raising the capital gains tax and introducing a tax on unrealized capital gains, while Republican candidate Trump proposes implementing a comprehensive 10% tariff policy. Whether it is raising capital gains tax or imposing tariffs universally, tax reform measures are expected to increase US fiscal revenue, but at the same time, they are also accompanied by varying degrees of negative impact. The increase in capital gains tax rate may trigger asset "lock-in effect", where investors hold assets for a long time due to tax avoidance, leading to a decrease in market liquidity. The widespread imposition of tariffs is equivalent to levying a consumption tax on residents, increasing the economic burden on American households. Looking ahead, if Democratic candidate Harris wins the election and implements his policy of raising capital gains tax, he still needs to be wary of the risk of a pullback in the information technology, optional consumption, healthcare, and telecommunications service sectors. On the contrary, if Republican candidate Trump is elected and implements universal tariff policies, the US stock market cycle and consumer sector may come under pressure.
Harris Tax: Taking wealthy households to contribute to the Ministry of Revenue, a dilemma to solve.
Since 2013, the current highest capital gains tax rate in the United States has been 20%, combined with a net investment income tax (NIIT) of 3.8%, resulting in a combined highest capital gains tax rate of 23.8%. The Democratic Party in the United States is actively promoting capital gains tax rate reform. Harris proposed to raise the highest capital gains tax rate to 28%. After including NIIT, the highest comprehensive capital gains tax rate in the United States will rise to 33% at that time. In addition, Harris proposed implementing multiple new tax policies targeting high-income groups, including levying unrealized capital gains tax. However, the United States currently does not impose taxes on unrealized capital gains; Therefore, if the Democratic Party wants to implement new policies, it will not only face constitutional challenges, but also need to overcome practical operational obstacles in the taxation process. However, the feasibility of increasing capital gains tax is still relatively high. Although Harris' proposed capital gains tax increase measures mainly target the high-income group in the United States, which accounts for a small proportion of all taxpayers, the expansion of the tax base is expected to significantly increase US fiscal revenue due to the large amount of capital assets held. However, the expansion of the capital gains tax base may lead to potential negative impacts, such as asset "lock-in effects" or adverse effects on long-term economic growth in the United States. However, as Harris' entire tax reform plan also includes other levels of tax reduction measures, the overall negative impact of increasing capital gains tax on the economy is expected to be relatively limited.
Trump Tax: Global Taxation, Friends Save Themselves.
During the 2024 election, Republican candidate Trump advocated for a uniform 10% tariff on all goods imported into the United States. From a narrow perspective, universal tariffs can be seen as a variant of consumption taxes. Tracing back to American history, the federal consumption tax was implemented in the early stages, especially during times of war and economic recession. However, with the establishment of a constitutional basis for the collection of personal income tax, the federal level consumption tax has gradually faded out and is currently only collected by state governments; Therefore, overall, the consumption tax burden in the United States is relatively low. Taking Japan's consumption tax reform as a mirror, we find that the increase in consumption tax rate often has a significant short-term impact on the level of social inflation. Meanwhile, according to the intertemporal consumption theory, consumers tend to balance their consumption levels between different periods to maximize overall utility. Therefore, in the process of increasing the consumption tax rate, consumer behavior patterns will change, that is, consumption will grow ahead of policy implementation, followed by consumption suppression. As consumers gradually adapt to the new tax rate environment, their consumption level tends to stabilize and rebound. According to CRFB's prediction, Trump's proposed 10% comprehensive tariff policy will bring about a cumulative tax revenue of approximately $2 trillion to the US Treasury by 2035. However, the above policies will also lead to increased burden on American households and increase inflation risks, or have a negative impact on the US economy.
How does the capital market behave under different tax policies of the two parties in the United States?
If Democratic candidate Harris wins, we still need to be vigilant about the risk of a pullback in sectors such as information technology and telecommunications services. Looking back at history, the last time the United States raised its capital gains tax was in 2013, when Obama was successfully re elected as the President of the United States. In the process of the capital gains tax hike, since October 2012, the trading volume of the S&P 500 index and Nasdaq index has rapidly increased. Among the primary industries in the US stock market, the information technology and telecommunications services industry showed the most significant year-on-year growth trend in transaction volume during the same period. Since the last round of capital gains tax adjustment, the information technology industry has cumulatively increased by 879%, and the optional consumption and healthcare industries have also achieved significant growth. In this round of bull market in the US stock market, the information technology and telecommunications service industries rose by 121.6% and 96.1% respectively; Based on the market's selling behavior during the expected increase in capital gains tax in 2013, we conclude that once the tax base is adjusted, investors in the aforementioned industries may be more inclined to realize profits and settle their positions. Given this, if Harris wins the US election in the future and advances his capital gains tax reform plan, he still needs to be vigilant that before the actual implementation of the tax increase policy, investors may face increased selling pressure in the US stock market due to risk aversion in advance, especially in the information technology, optional consumption, healthcare, and telecommunications service sectors.
If Republican candidate Trump wins, the cyclical and consumer sectors may come under pressure. Based on Japan's experience of raising the consumption tax rate in 2014, the impact cycle of fiscal policy adjustments on corporate income and profits is roughly three quarters. However, given the resilience demonstrated by the US economy and the fact that Trump's policy agenda not only includes a wide range of tariff strategies, but also proposes measures to reduce corporate income tax, we expect that the overall recovery pace of US consumption levels may be faster than that of Japan after the implementation of comprehensive tariff measures. In 2023, the main imported goods of the United States will be concentrated in the fields of industrial products and consumer goods. Therefore, if Trump wins the US election and quickly pushes for the implementation of comprehensive tariff policies, the cost of such imported goods may significantly increase. In addition, during the 2018 US China trade friction, there was a significant pullback in the cyclical sectors of the US stock market, while the tariff measures implemented by the US government at that time were still within specific tariff categories. If Trump is elected and implements a comprehensive tariff policy, we predict that the consumer sector and industries such as industry and raw materials in the cyclical sector of the US stock market may face significant downward pressure.
Risk factors:
The Federal Reserve's monetary tightening has led to systemic financial risks; The recovery of US stock performance is lower than expected; The spread of risks in overseas financial systems; Global geopolitical conflicts have further escalated.
Note: This article is excerpted from the report "US Stock Strategy Special Topic - CGT vs Blanket Tariff, How Does It Affect US Stocks?" published by CITIC Securities Research Department on October 24, 2024. Analyst: Xu Guanghong; Wang Yihan S1010522050002