Kamala Harris wants to raise corporate taxes and limit price hikes, but investors and economists are sceptical. They fear these plans could hamper economic growth and have little chance of success.
The market fears that increasing the tax from 21 to 28 per cent will stifle economic growth, while limiting price hikes is seen as a dangerous gamble.
The New York Post has dubbed Harris’ new economic proposals, revealed at the Democratic convention in Chicago last week, as “Kamunism.” Meanwhile, Donald Trump has replaced his criticism of “Sleepy Joe” with a new target: “Comrade Kamala.”
Beyond the political drama in the United States, market participants and economists remain sceptical about the Democratic Party’s plans.
“Kamala’s proposals are less controversial than Trump’s, but the Democratic agenda may also lead to economic weakening,” said Rogier Quaedvlieg, Americas economist at ABN Amro. He sees price restrictions and a proposed ‘down payment savings plan’ for housing markets are particularly problematic.
28% corporate tax proposed
A central element of Harris’s economic strategy is increasing the corporate tax rate from 21 percent to 28 percent. The Democrats argue that this measure is essential to fund social programmes and tackle income inequality. However, Rogier Quaedvlieg from ABN Amro believes that while a higher corporate tax rate might slightly reduce core inflation for consumer goods, it is unlikely to have a significant impact on future Federal Reserve policy, as he told Investment Officer.
“The Federal Reserve is expected to further ease its interest rate policy in 2025 and maintain a neutral rate afterwards,” Quaedvlieg said. He cautioned that raising corporate taxes could partly counteract this economic stimulus, potentially slowing overall economic growth by about half a percentage point per year. Strategists at Goldman Sachs have calculated that each percentage point increase in the corporate tax rate could reduce S&P 500 company profits by just under 1 percent.
In contrast to Harris’ approach, Donald Trump has proposed cutting the corporate tax rate to 15 per cent. His previous tax cuts, which lowered the rate from 35 per cent to 21 per cent in 2017, led to a substantial rise in US stock markets.
Ban on price hikes
Another key component of Harris’s plan is to combat steep price increases in supermarkets. The proposal to implement a federal ban on price hikes for essential goods may appeal to voters concerned about inflation, but the market’s reaction is uncertain.
“The move to combat excessive prices seems to be a response to claims that inflation has risen under her policies. This way, she addresses two issues at once,” Quaedvlieg noted. “She shifts the responsibility to companies and presents a strategy to prevent future price increases,” he added. However, Quaedvlieg warned that the US debt issue is complex and cannot be easily addressed by fiscal policy alone. Historically, price controls have seldom achieved the desired effect and often lead to higher prices instead.
First-time homebuyer subsidy
The introduction of a “down payment assistance plan,” a $25,000 subsidy aimed at helping Americans with down payments for their first homes, has also received a lukewarm response. This initiative, designed to ease high housing costs, could ironically drive house prices even higher due to the limited supply of homes. Although Harris has expressed a desire to build more houses, she has not provided concrete details on how she plans to achieve this.
“These additional proposals are quite economically controversial, and there is little in them that excites me. Again, the question is where the funding will come from. Given that Harris seems to be largely continuing Biden’s fiscal policies, cuts will have to be made elsewhere to prevent the budget deficit from increasing further,” Quaedvlieg commented.
Major changes appear unlikely
Harris’s ambitious plans to raise corporate and wealth taxes could be blocked by a divided Congress or a Republican-controlled Senate. If the Democrats only achieve partial success, the most likely changes would be an increase in the personal tax rate for the highest income bracket—a direct outcome of the expiration of Trump’s tax cuts. Meanwhile, Biden’s tax relief for lower-income households could be extended.
Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, estimates a 40 percent chance of such a scenario. She expects the impact on economic growth, inflation, monetary policy, and the US dollar to be minimal. However, sectors focused on sustainability and energy efficiency might have a more positive outlook, while the fossil fuel industry and financial services are likely to remain under pressure, she said in a note to clients.
For investors seeking a strategy that is less affected by political changes in Washington, Michael Zezas, managing director at Morgan Stanley, recommends making long-term investments in European and Japanese equities and heavily investing in corporate credit and mortgage-backed securities. In a client note, he stated, “The business cycle has significantly more influence on equity markets than the sitting president.”