Daniels Trading is nonpartisan and does not endorse political candidates. The purpose of this blog post is to provide objective, unbiased information on what we believe could happen in the markets. The content is not intended to convey a preference or state a position in support of any candidate, and the sentiments expressed do not necessarily reflect the viewpoints of our team members.
Joe Biden’s victory in the 2020 General Election marked a major shift in U.S. tax policy. The previous four years brought Trump-era tax cuts, and Biden campaigned on a platform of making corporations and the top 1 percent “pay their fair share.” Ultimately, the campaign promise proved effective at the polls.
What will potential tax hikes mean to the futures market trading environment? Let’s take a look at Biden’s plan and how it may impact economic growth, the U.S. dollar, and asset pricing.
Tax & Spend: The “Made In America Tax Plan”
As the 2020 Democratic nominee and the 46th president, Joe Biden has been a vocal taxation advocate. In an April 28, 2021, address to Congress, Biden summed up his feelings while announcing the American Families Plan: “I think you should be able to become a billionaire or a millionaire. But pay your fair share.”
With the U.S. Treasury’s Made In America Tax Plan, the Biden administration aims to cover trillions of dollars in government spending by raising taxes on high earners and corporations. This is to be done in two phases: ratification of the American Families Plan and the ratification of the American Jobs Plan. At this point, the impact of the pending legislation on futures market trading remains unclear.
The American Families Plan
According to the nonpartisan Institute on Taxation and Economic Policy, here are the key tax provisions in Biden’s American Families Plan:
- Raise the top personal income tax rate to 39.6 percent.
- For individuals with income upward of $1 million, tax capital gains and dividends at 39.6 percent.
- End capital gains exclusion on assets left to heirs exceeding $1 million ($2 million for married couples).
- Make permanent existing limits on pass-through business losses.
One of the primary purposes of the American Families Plan is to generate tax revenue from the income and assets of “top earners.” As it pertains to futures market trading, it isn’t unreasonable to believe that a high volume of personal stock and commodity portfolios may be liquidated ahead of the American Families Plan becoming law.
Although projecting the market impact of such an action is largely a theoretical exercise, a downturn in U.S. equities and select commodities may develop. For futures, bearish volatility facing gold, silver, the E-mini S&P 500, E-mini DOW, and E-mini NASDAQ may come to pass.
The American Jobs Plan
The American Jobs Plan was officially proposed in late March 2021. In it, the Biden administration targeted corporations with a collection of enhanced tax levies. The U.S. Treasury’s Made in America tax plan succinctly outlined the key points:
- The corporate tax rate is raised from 21 percent to 28 percent.
- A 15 percent minimum tax applies to corporate book income.
- A global intangible low-taxed income (GILTI) of 21 percent is instituted.
If the American Jobs Plan becomes law, the tax liability for corporations is slated to increase significantly. On the surface, companies will see a 7 percent bump in income tax and increased regulations facing write-offs. Given this structure, many multinational corporations may choose to downsize or relocate to minimize negative financial impacts.
Subsequently, many smaller companies may follow suit to avoid additional liabilities. If downsizing and relocation become trends in the business community, U.S. GDP growth is likely to suffer. This phenomenon has the potential to impact several facets of futures market trading, including:
- Higher tax rates will place added pressure on corporate profitability. This can hinder sectoral growth and drive bearish sentiment toward American equities index futures.
- If collected tax revenues cover the $2 trillion in spending proposed by the American Jobs Plan (not to mention the $1.8 trillion American Families Plan), the supply of U.S. dollars (USD) is going to grow significantly. The increasing money supply has the potential to spur the devaluation of the USD. Under this scenario, inflation will contribute to higher commodity futures prices and compromised performance of the USD against other global major currencies.
Politics Is a Primary Factor in Futures Market Trading
One of the positive things about the Biden administration’s tax plans is that there is little uncertainty; taxes are going up on corporations and select individuals if the proposed laws are enacted. It appears that next year is a likely timetable for the Biden tax doctrines to come to fruition.
These proposed tax policies may have an impact on your futures trading strategies. If you’re considering taking smaller positions, the E-minis, Micro E-minis, and the Smalls may offer opportunities for your trading. To learn what trading small can do for you, download Daniels Trading’s Reduced Size Means Equals Big Opportunity e-book today.