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  • Writer's pictureJoe Carson

Does the Presidential Election Matter? It Does & A Lot

The fast rise in equity prices since the election on November 3 suggests that investors have already rendered their verdict on the potential economic and financial outcomes. That is, regardless of the outcome of the presidential election the investor-friendly trilogy R.S.T.---low Rates, fiscal and monetary Stimulus, and no Tax increases---will continue. Here’s why that happy prophecy might be wrong.

Investor optimism seems to be rooted in the view that the November election did not move the political needle very much. Based on the congressional elections it is hard to argue against that view. Even though a few seats have yet to be called it does appear that Republicans will maintain a razor-thin majority in the Senate, while the Democrats will hold a smaller majority position in the House. So investors view a split-congress as a bullish signal as no side can dictate terms over the other.

But the biggest unknown is who will be president in 2021. In recent years, the power of the presidency has increased a lot. Some of that is a function of the failure of Congress to legislate. That is especially true when no political party controls the Senate and the House. As a result, it has been hard to find or build a consensus, or a middle ground, on legislative items.

Slim majorities in the Senate have also enhanced the power of the presidency. For the Senate to overrule a presidential veto it needs two-thirds of its members. That almost never happens nowadays. So the president has a “louder” voice and “larger” role in all major legislative items, and also the ability to circumvent Congress with executive orders.

That “louder” voice and “larger” role was on display in the last two years. Several legislative efforts of the Democrat-led House never received any consideration in the Republican-led Senate because it went against the position or policies of the current Administration. So in practice, the Democrat-led House was squeezed, with several legislative initiatives never receiving a hearing in the Senate.

If the presidency flips it is very possible that the Republican-led Senate could be squeezed. No longer would the Senate be able to refuse to consider legislative items passed by the House and supported by the new Administration. That does not guarantee passage of legislation but it would result in committee hearings and at the margin shifts the balance of power away from the Senate.

The biggest change from a shift in the presidency could be taxes. Under current law, the most important business tax deduction full expensing of business equipment (100% of bonus depreciation) will begin to be phased out at the end of 2022. At the end of 2025, most of the items of the 2017 tax legislation that lowered individual taxes will expire. So taxpayers will see a large tax increase in 2026.

The current Administration has had plans to make the 2017 tax law changes permanent. A shift in the presidency would most likely eliminate the possibility while raising the risk that a tax hike could occur sooner for businesses and high-income people.

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