Over the past couple months the Launch Capital Research Team has been working to update our annual Megatrends predictions. Part of this process is to consider some of the more diffuse determinants of economic development: resource scarcity (both human and material), environmental conditions, geography and inevitably politics. Although the causational relationship between the economy and political policy is often debated, it should nevertheless be accounted for.
With an enormous Federal debt and a lagging economy, the 2012 election could have major market implications. Due to the cloud of uncertainty surrounding the future of the American economy, many private investors, from large institutions to individuals, anxiously wait on the sideline; with a high premium on stability and long-term holdings. Families are embracing a similarly risk averse ideology through the deleveraging of their balance sheets, exemplified by declining average household debt (with the exception of student loans).
The indecisiveness of Congress and its inability to revive the economy continues to fuel uncertainty from Wall Street to Main Street, resulting in a “wait and see” mentality in regards to investment and new hires. Understanding the economic policies of each Presidential candidate is invaluable when attempting to predict future economic attitudes. Based on our findings below we have concluded that neither candidate offers a strategy that is likely to gain bi-partisan support or radically change the path of the nation. Without the prospect of successful or implementable policy we believe the 2012 election is unlikely to shift individual uneasiness about their economic future.
Data and excerpts from Tax Policy Center Analysis of Romney Tax Plan:
Romney Policy Summary:
The full implementation of Romney’s tax policy (expected to occur in 2015) would decrease Federal revenue by 900 billion or roughly 24 percent of projected revenue. In relation to current policy baseline, assuming the extension of the Bush Era tax cuts, indexing of AMT, elimination of payroll tax cuts, and the extension of all existing temporary tax policy, Romney tax policy decrease Federal revenue by $480 billion in 2015.
Romney states that the lost tax revenue will be recovered through closing corporate and individual tax loopholes, and the broadening of the tax base. Specifically, Romney claims that all tax cuts will be revenue neutral, a feat that the TPC argues to be impossible without increasing the taxes of individuals making less than $200K. More specifically, the TPC argues that Romney’s plan to reduce the marginal income tax rates, eliminate the estate tax, eliminate the ATM cannot be revenue neutral with increasing tax for some individuals making less than 200K.
Romney also has yet to specify what loopholes he would target and the extent to which loopholes would recover revenue. Romney recently hinted at one such reform, which would be the capping of the amount of deductions a taxpayer could claim.
Romney promises austerity, proposing capping federal spending at 20 percent of GDP, which we assume will be gradually phased in over fiscal 2013 through 2016.
Romney’s supports the “cut, cap and balance” strategy that has been a fixture of the Republican party.
- Romney has stated that he will cut back on many of the regulatory measures of the Dodd Frank Act, but not abandon the act entirely.
In the most recent debate Romney suggested he would repeal and replace the Dodd Frank Act
- Plans on declaring China a currency manipulator, and generally more aggressive in the treatment of China
Data and Excerpts from Congressional Budget Office Analysis of Obama 2013 Budget Proposal
Obama Policy Summary:
Individual Impact of Obama’s tax policy (According to TPC):
- Relative to current law, the entire package of proposals would reduce taxes in 2013 for nearly three-quarters of all households and raise taxes for about 6 percent.
- Individuals at either end of the economic spectrum would be less likely to see their taxes decline
- 30 percent of both those in the bottom quintile (20 percent of tax units) and those in the top 1 percent would see their taxes go down.
- 71 percent of those in the top 1 percent would face a tax increase, compared with just 1 percent of those in the next-to-top quintile (60th through 80th percentiles)
By CBO’s estimate, those policy changes would, on net, add about $2.9 trillion to projected deficits over the 2013–2022 period and necessitate $0.6 trillion in additional interest payments (because of increased federal borrowing). Most of the net budgetary impact would come from changes in tax policies, but changes in spending policies would also play a role.
- In 2013, the deficit would decline to $977 billion (or 6.1 percent of GDP)
- The deficit would decline further relative to GDP in subsequent years, reaching 2.5 percent by 2017, but then would increase again, reaching 3.0 percent of GDP in 2022.
The CBO develops a yearly budget baseline, “CBO’s baseline projections largely reflect the assumption that current tax and spending laws will remain unchanged, so as to provide a benchmark against which potential legislation can be measured”. In comparison, Obama’s plan is projected to add $82 billion more in debt over the baseline projections
The American Jobs Act
- Initially proposed in September 2011 as a $447 billion package of household and business tax cuts, public investments, safety-net spending, and aid to state and local governments
- After the release of the president’s 2013 budget, Congress enacted scaled-back versions of two major AJA proposals for the remainder of 2012: a 2 percentage-point employee-side payroll tax holiday (AJA proposed 3.1 percentage points) and a reduced extension of the emergency unemployment compensation (EUC) program.
- The president continues to support passage of the AJA provisions that Congress has not acted
Beyond the Policies:
Due to the current polarizing nature of politics and a divided congress, the policies proposed by both candidates face a difficult future.
Despite the political gridlock, two policies are coming to a vote following the election regardless of the politics of the presidential winner.
The overarching issue is the fiscal cliff, as series of spending cuts and tax increases (including the expiration Bush Tax Cuts) as outlined by the Budget Control act of 2011 if there is no consensus on reducing the deficit. Without a consensus, based on estimations J.P. Morgan economist Michael Feroli, there would be an automatic tax increase of $405 billion and automatic spending cuts totaling $98 billion.
Bush Era Tax Cuts
The Bush Era Tax Cuts have been extended to the end of 2012 at which point they either expire, be extended, or permanently adopted.
Tax Rate Changes if Congress doesn’t act
- Long-term capital gains rate raises
- Dividend tax rates rise to 15%-39.6%
- Child tax credit falls to $500
- Estate tax exemption falls to $1M
- Payroll tax rises
The biggest tax cuts in the 2003 law applied to dividends and long-term capital gains. Dividends used to be taxed at the same rate as normal earned income. The 2003 law taxed dividends at a flat 15 percent across all tax brackets. As for income earned from selling investments stocks, bonds, investment real estate — the rate fell from 20 percent to 15 percent for those in higher tax brackets, and from 10 percent to 5 percent (and to zero by 2009) for those in the 15 percent tax bracket and below.
Romney supports the permanent adoption of the Bush Era Tax cuts.
Obama’s stance, based upon his 2013 budget and his opinion in 2010 when the cuts were initially going to expire, is to continue the cuts except for high income taxpayers.
Based on our assessment of both candidates proposed economic policies, we believe a drastic jumpstart to the economy due to policy is unlikely. Obama is focused on more of the same policy implemented during his first term, which added over a trillion dollars to the deficit without major job or GDP growth. Romney hopes to facilitate economic recovery through supply side economics, a strategy that currently and historically has been met with significant controversy. Regardless of the impact of tax cuts, Romney’s policy is unlikely to get Congressional approval.
Neither candidate provides an effective roadmap for reducing the deficit. Obama’s current 2013 budget proposal is expected to increase the deficit. Romney’s current tax policy significantly reduces federal revenue, and without a definitive (or fully explained) means of recovering that lost revenue reducing the deficit is doubtful.
The bigger piece of the puzzle, however, is how each candidate will impact the current congressional gridlock. Obama has failed to bridge the ideological divide, and in some cases further polarized congress. Romney’s policies represent a further continuation of the conservative Republican ideology. Romney plan of cutting taxes and spending is likely to further polarize congress. In addition, Romney’s signing of the tax pledge is also a symbolic gesture of a future unwillingness to compromise.
We do believe that the business community and the stock market will respond more positively to a Romney victory. Corporate optimism is likely to follow a vocal pro-business candidate. Romney’s policies also favor the private sector, with a significant focus on incentivizing private sector growth. We are unsure, however, how long this optimism will sustain itself due to the difficulty Romney’s will face passing partisan policy though a divided congress. Obama is unlikely to elicit the same optimism if he wins a second term. In addition, the perception of Obama as anti-business has fueled Wall Street’s unease, a trend likely to continue with a second term.
The 2012 election will provide greater certainty in who will be our next President, but we do not believe the election will lead to any fundamental changes will shift the risk adverse attitude of most Americans. While the election may provide temporary certainty on the immediate future of the Bush Era tax cuts or Fiscal Cliff, we contend that uncertainty regarding the long-term future of the American economy and government will remain.
 2015 is chosen to allow for the time required to turn policy into law and the point at which temporary tax policy Romney does not wish to continue will expire.
 NOTE: TPC report: http://www.taxpolicycenter.org/publications/url.cfm?ID=1001628
Links to Dissenting Opinion: