Taxes Are the Key to Election
10/23/2012 10:00 am EST
There won't be much difference between a Romney or Obama victory except on their tax policies, says Andrew Busch, who talks about what investors need to know.
I am here with Andrew Busch, and we are going to talk about the elections and the implications for the markets.
We have heard a lot of, if Obama is elected, taxes are going to go up. And, you know, rich people will be thrown in jail, and all of their property will be confiscated...or if Romney gets elected, the markets are going to rally 50%. What do you really see underneath all of that?
Well, it certainly is not going to be Robin Hood. So anybody who thinks that voting for President Obama is going to significantly change income inequality in the United States, that is not going to happen.
But what will likely happen is that...well, let me take a step back. Currently, the polls are expecting status quo for the elections—in other words, President Obama to win, the House to remain Republican, and the Senate to remain Democratic. Where the markets get very interested in it is the differences between the two candidates' tax proposals, and this is really significant because the fiscal cliff will be dealt with.
I think the tax proposals are more compelling, specifically on the corporate tax front. The reason why I talk about that is because it is the lowest hanging fruit to really get the economy going and getting growth going in the economy, and that is really the key for the election and the outcome.
President Obama has one plan: he cuts the corporate tax rate from 35% to 28%. Mitt Romney cuts it from 35% to 25%, but the key difference between the two candidates on corporate tax reform has to do when they talk about the extra-territorial nature of the tax code, which sounds a little arcane, a little crazy.
What it really is, is that we tax multinationals when they earn profits overseas. If they try to bring it back to the United States, it is taxed at 35%. It is never coming back. So if you eliminate that tax, you free up about $1.3 trillion to flow back into the United States.
Romney has that part of his corporate tax plan, the President doesn’t, and that is the major difference when it comes to tax policies for jobs and economic growth.
And that happened one time. There was, historically...
Right, 2004 and 2005. I happened to work very closely at that time with the Bush administration and the Treasury Secretary, working on that what they called the Dividend Repatriation Act.
They estimated that they got close to about $400 billion to move back into the United States. For all of you currency traders out there, this is significant, because it mainly occurred in the fourth quarter of 2005 and we saw a significant rally in the US dollar back then. So it is something you really want to keep an eye on.
And you think that if Obama is re-elected and the House and Senate stay the same, that there is less of a chance that the Republican bill will actually get through.
Yeah. I think that there is very little chance. It is really a matter of degree, but it is certainly a much larger difference between the two candidates on this particular front. In other words, the Republicans will vie for having more of a plan along Romney’s strategy versus President Obama’s.
President Obama is likely to cut the corporate tax rate, but he is going to lose it and he is going to get rid of exemptions. He is going to look at probably a net zero as far as having the money flow back to the United States as far as changing the tax code.
You will get shades of this—you know, both sides won’t get exactly what they want. But if President Obama is elected, he will get less of what the markets truly want, which is stronger corporate tax reform and cutting that corporate tax rate as far as dividends coming back to the United States.
And that has always been the greatest challenge. And people have argued for the past year or so that the reason we haven’t seen employment rise or any big cap ex spending has been because big corporations that are sitting on trillions of dollars are waiting to see some clear indication of what is going to happen with tax policy.
Yeah. And I think, you know, tax policy sounds so boring for most people, but it is so significant.
And you made a great point. A lot of the C-level executives are going, "Why would I invest in a plant that I have to make a two-year decision on when the country is being run quarter-to-quarter?" And literally, that is the way they are running the fiscal cliff situation. But that is where I think you get a lot of uncertainty in these surveys that they do for CEOs.
You see it on the corporate balance sheets. It is between $1.2 trillion to $1.7 trillion that is just sitting there doing nothing, because they guys don’t feel comfortable moving forward with plans. Hopefully, as we get through this election and we get some certitude for these guys, for the CEOs, we will get some of that money released.