It seems every election season brings out the worst anxiety in people.
Take the stock market for example. Every single presidential election cycle pretty much follows the same pattern. The months leading up to the election are typically marked with extreme volatility; then, immediately following the election, the market drops.
It doesn’t matter who wins – Democrat or Republican – the market will drop then immediately rebound once uncertainty goes away. 2016 was the same and this year will be no different.
On top of the seasonal election anxiety, this year has added yet another dimension of stress for many voters. That’s because one of the candidates has unapologetically declared his intention to raise taxes and eliminate many exemptions and deductions that businesses and individuals have relied on to reduce their taxes.
That candidate is Biden and this is how he plans to reform taxes:
- The top income tax rate will be raised from 37% to 39.6%.
- Capital gains will be taxed at ordinary rates. For those with annual incomes over $1 million, that means a tax of 39.6% on capital gains.
- The corporate income tax rate will be raised from 21% to 28%.
- A 12.4 percent Social Security payroll tax will be imposed for wages above $400,000.
- Phase-out of the “small business tax deduction” on pass-through earnings (otherwise known as the qualified business income deduction) for filers with taxable income above $400,000.
It’s clear businesses and top earners are being targeted here. These changes will cause many businesses and high-income taxpayers to adjust their strategies and the way they proceed with their businesses to cope with the new tax regime.
If Biden wins, I predict the highest flurry of activity will come from business owners who were already contemplating the sale or transfer of their businesses in the coming years.
Instead of waiting until the new tax policies are passed and see capital gains from the sale of their business be taxed at ordinary rates (almost double for many taxpayers), many business owners will likely accelerate the sale or transfer of their business to avoid the higher taxes.
For everyone else, the cost of business will go up with higher taxes and diminished deductions squeezing profits.
Does this all mean business and investing will go away?
Of course not, but with profits squeezed, I’m sure there will be allocation shifts as businesses and investors assess the new financial landscape and plot a course to ensure resources will be allocated to their most productive uses.
In other words, with the cost of doing business going up, they no longer have the luxury of taking undue risks and will gravitate towards assets that offer the best risk-adjusted returns.
There’s no such thing as a sure thing, but savvy investors invest in demand – essential goods and services consumers will always need and demand.
These sophisticated investors have already been planning for this potential change in tax policies. In fact, by investing with a long investment window, it doesn’t matter what the taxing regime is, in the long-run, the assets they gravitate towards will produce the highest risk-adjusted return – in any economy.
When people think of the Great Depression, I’m sure they have this picture in their minds of complete and utter desolation – with every town a ghost town with stores and shops boarded up with more tumbleweeds roaming the streets than people. At least that’s the Hollywood version.
There’s no arguing the Great Depression was one of the most desperate times in our nation’s history, but let’s not forget that 50% unemployment also meant 50% employment. There were still people going to work because there were still goods and services that people still needed and believe it or not there were people who made fortunes during this time.
Procter & Gamble was one of the success stories of the Great Depression because it turns out people still needed soap and toiletries – even in bad times.
What other industries thrived during the Great Depression… food, shelter, household products, healthcare, communications, and security.
In a downturn, there may not be as much demand for luxury penthouses, but there’s always going to be a need for affordable housing. Maybe there will be less steak on the dinner table and more peanut butter and jelly sandwiches, but you get the idea. People will always need essentials like food, shelter, etc.
Elections bring out a lot of anxiety in people and maybe even more so this election cycle with Biden threatening to raise taxes on businesses and high-income earners.
Many savvy investors have lived through several administrations – both Republican and Democrat – and many of them have learned to thrive through any regime by investing in essential goods and services that will always be in demand and investing in the long-term.
Because in the long run, it all evens out. Case in point, one administration may raise taxes while the next one will reduce them. It’s like the weather in Texas. If you don’t like it, just wait a couple of hours.
Investing for the long-term in essential goods is always a good bet.
