Wall Street is worried. Democrats seem to have a shot at winning two Senate runoff races in Georgia, with the results likely in by the end of the week. If Democrats win both, they’ll win a narrow majority in the Senate and take full control of Congress.
Money would evaporate immediately, some analysts worry. Stocks fell sharply to open 2021, as polls showed the two Democrats had slight leads over the Republican incumbents. Oppenheimer predicted a market correction of up to 10% if Democrats win. The idea is that Democrats will promptly hike taxes, overregulate banks and shackle the economy, spreading gloom everywhere.
If Democrats win and stocks really tank, this could be one of those dips smart investors live to pounce on. It’s true that incoming President Joe Biden wants to raise taxes on businesses and the wealthy, and some Democrats want to go further than him. But the likelihood of major tax changes in Biden’s first or even second year are small, and some developments under a Democratic Congress could be better for stocks and the economy than if Republicans retain a blocking position in the Senate.
If Democrats control Congress, the first order of business after Biden takes office on Jan. 20 is likely to be not tax hikes, but another coronavirus relief bill, with additional stimulus checks for most households and an extension of supplemental aid due to expire in March. Every relief package pushes up the national debt, which could be a problem someday. But not now. Markets have reacted favorably to every other stimulus package, since they boost spending and help businesses in the short term. Markets would probably rise on another such bill.
Biden also favors an infrastructure plan that could be part of a new stimulus bill, or a standalone package that could pass with bipartisan support. This would be good for markets, too. It might not be an immediate injection of cash, but infrastructure spending is generally a good way to spend public funds because it makes the economy more efficient and generates long-term returns.
Biden wants to raise taxes not just for the heck of it, but to generate revenue that can fund more affordable housing, aid for needy students, child and elder care, and other priorities. He’d raise the business tax rate from 21% to 28% and hike income and capital-gains taxes for wealthy Americans. His plan is carefully constructed so that no family earning less than $400,000 would face a tax hike.
Counterproductive to raise taxes in a downturn
If Biden took office and promptly raised all those taxes, effective immediately, it could in fact depress markets. But don’t expect tax hikes any time soon. First, many economists say it’s unwise to raise any taxes during a downturn, when the government is flooding the economy with stimulus meant to trigger any kind of spending. It would simply be counterproductive to raise taxes, and Biden would probably delay tax hikes until 2022 or later.
If he demanded tax hikes from Congress, he still might not get them. The best the Democrats can hope for in 2021 is a 50-50 tie, with incoming Vice President Kamala Harris casting any tie-breaking votes in favor of Democrats. That’s the slimmest possible majority and a very fragile one. There are at least two conservative Democrats, Joe Manchin of West Virginia and Jon Tester of Montana, who won’t support excessive or poorly timed tax hikes. Fears of a Democratic majority are based on the flawed assumption that all Democrats will support every Democratic proposal, which is not how it’s going to work.
If the economy is healthy again by 2022, and Democratic tax hikes look plausible, Democrats will still have to consider how anything they pass is likely to affect their prospects in the 2022 midterm elections. It’s typical for the president’s party to lose Congressional seats in the first midterm after he takes office, and Democrats have no margin for error. They could easily lose control of both chambers in 2022, similar to what President Obama experienced. His fellow Democrats controlled Congress for just his first two years. They lost the House in 2010 and the Senate in 2014, with Republicans able to block most of Obama’s agenda for most of his time in the White House. As vice president, Biden was there for that.
Are Democrats dumb enough to pass laws that will torch stocks and strangle businesses with regulations, dooming their hold on power? Maybe. But Democrats in 2021 will suffer from post-traumatic Trump disorder, a powerful reminder that if they blow it again, it could mean many more years of torment in political exile.
Some Democrats, such as the Bernie Sanders wing, don’t seem to care. But Biden pointedly ran, and won, as a moderate alternative to the Sanders revolution. He won just enough middle-class centrists to beat Trump, and those voters have investment accounts and retirement plans they’ll be checking on in the fall of 2022. Biden surely knows his job is to keep those voters on his side.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: [email protected]. Click here to get Rick’s stories by email.
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