As the political season heats up, former President Donald Trump and current Vice President Kamala Harris have made several proposals to strengthen the economy. Here, we’ll examine some of Harris’s proposals and their potential consequences. Ms. Harris has several other policies not listed below, but here are some of her major proposals we can expect if she wins in November.
Down Payment Assistance for First-Time Homebuyers
Vice President Harris is proposing a $25,000 tax credit for first-time homebuyers. This will certainly create more demand for housing. Unfortunately, home prices are still high due to a lack of supply and relatively strong demand. This proposal will raise demand for houses and cause home prices to rise further. As home prices rise, more and more people at the middle and lower end of the economic spectrum will be priced out of the market. While this policy may translate into more votes, in the long run it could hurt many of the same people she’s trying to help.
Long-Term Capital Gains Tax
Capital gains taxes are typically lower than the rate of tax on ordinary income. This is intentional as it helps foster a vibrant capital market (i.e. investment) which is essential to a strong economy. In the Harris proposal, LTCG rates will rise from their current 0%, 15%, or 20% (depending on your tax bracket) to a flat 28%. The new rate would apply to those with taxable income greater than $1 million. While this would raise taxes on the rich, remember the rich own a majority of outstanding shares. If this becomes law, those investors may feel pressure to sell before the law takes effect. This selling pressure could cause stock prices to fall, which would hurt everyone invested in the stock market, including those in the middle-class. Thus, while it targets the rich, the fallout could hurt millions who are not wealthy.
Individual Marginal Tax Bracket
Harris is proposing to raise the top marginal tax bracket from 37% to 39.6%. While this may not sound like much, the level of income that would subject taxpayers to the new, higher rate is quite a bit lower under her proposal. For example, at present, a single filer falls into the top 37% bracket when their taxable income exceeds $609,350 and a married filer when taxable income exceeds $731,200. Under the Harris proposal, a single filer would be subject to the new 39.6% bracket when their taxable income exceeds $400,000. A married filer hits the higher bracket at $450,000 in taxable income. Tax hikes are considered a headwind to economic growth, and this should be no different.
Unrealized Capital Gains Tax (New)
Harris is proposing a brand-new tax on unrealized capital gains for high-net worth individuals. Here’s an example of an unrealized gain. Let’s say you buy 1000 shares of stock at $100 per share (total investment $100,000). Assume in two years, the stock price has risen to $125 per share. Your investment is now worth $125,000 and your unrealized gain is $25,000 ($125,000 – $100,000). It’s unrealized because you haven’t sold the stock yet. Under Harris’s plan, you would owe capital gains tax on the $25,000 gain, even though you didn’t sell the stock. Thus, you would have to find the money to pay the tax from another source. What happens if the stock price falls to $90 per share? It’s unclear, but you should be able to claim a loss, again, even though you haven’t sold. This could create a high amount of uncertainty among investors and may lead to less investment in our capital markets as investors seek to avoid this tax.
Corporate Income Tax Increase
Harris is proposing an increase in the corporate income tax rate from 21% to 28%. Higher corporate taxes will cause some corporations to relocate outside of the U.S. to a country with a more favorable tax environment. This is called a tax inversion and tends to occur more often when the government raises corporate tax rates. Why? Because U.S. corporations must compete on a global stage. Thus, if taxes are too high in the U.S. they may decide to relocate to another country with a lower tax burden. Ireland is one popular choice with its 12.5% corporate tax rate. Businesses are essential to jobs. You cannot have one without the other.
It’s worth mentioning again that tax increases are a headwind to economic growth. When the government extracts more and more taxes from individuals and corporations, there is less money available in the private sector to spend and invest. Also, the federal government can redistribute tax revenue to select areas of the economy. In other words, the government can pick and choose which companies and industries will benefit. This creates increased pressure from lobbyists who attempt to influence politicians with the purse and various incentives. In many respects, this is one of the many problems in Washington. We’ll look at Trumps tax policies, including his tariff policy, in a future article.